Q&A: World Bank Plan to Value Ecosystems

Mangroves in Thailand. Photo credit: flickr/gumuz

Last week at the UN Convention on Biodiversity, the World Bank launched a new program that aims to put a value on a country’s ecosystems in the same way a country measures its national income and product accounts, or GNP and GDP.

Note: This post was updated on November 4, 2010 to provide additional information.

In this Q&A, WRI’s Janet Ranganathan and John Talberth discuss why countries need to start measuring the value of nature and the benefits and challenges of setting up these so-called national ecosystem service accounts.

What are ecosystem services?

Ecosystem services are the benefits that nature provides to people. Food, freshwater, timber and cotton for clothes are some of the most familiar and visible services. But there are other types of unseen services that we often take for granted, for example the ability of forests to sequester carbon and mitigate climate change and the way in which wetlands filter and purify water.

What are national ecosystem service accounts and why are they needed?

Conventional measurements of national economic performance, such as Gross Domestic Product and Standard National Accounts, do a poor job of tracking stocks and flows of ecosystems and their services. A country can cut down its forests, drain its wetlands and pollute its water sources and none of this shows up in the national accounting system. There is therefore little incentive for better management of precious natural resources.

By giving these assets a value and including them in the national accounts, the hope is that what gets measured will get managed. Current macroeconomic decisions largely fail to account for natural assets, leading to decisions that degrade ecosystems.

Properly accounting for natural capital stocks and ecosystem service flows is one of the lynchpins of sustainable development. All economic activity depends on the quantity and quality of underlying capital. Capital takes four basic forms: built, social, human, and natural. By maintaining our capital stocks in good condition we insure that future generations will be at least as well off as we are today. Ecosystem service accounts help advance this goal with respect to natural capital.

These new accounts will also raise awareness about the value of a country’s natural assets and increase public support for decisions that are better for people and nature.

What is the connection between ecosystem services and economic development?

Economic development and ecosystem services are intertwined. We can’t really deal with one without dealing with the other. Unfortunately, the current mindset of society is to put economic development and nature in separate boxes, overseen by separate government agencies and separate academic disciplines. We think that protecting the environment is an impediment to development. We view it as a cost. Thinking about the environment in terms of ecosystem services can transform that mindset and help us see and value the environment as a series of assets or benefits that development in fact depends upon. By including ecosystems as assets alongside capital, labor and other commonly measured units in national accounts, governments will hopefully spur economic growth while sustaining or even growing natural assets.

What are some of the challenges of creating national ecosystem service accounts?

Architects of green accounts must grapple with three measurement challenges: how to define standardized units, how to measure physical quantities and how to assign values. None of these tasks are easy. Unlike conventional accounts that track the value of goods sold (such as houses, cars, and food) many ecosystem services are not traded so the unit of measurement is not always obvious. Consider the ecosystem service of pollination. Should economists assume it is already captured in agriculture products sold or should they use a proxy, such as the number of pollinators or pollinations?

If the accounts are to be integrated into existing national income accounts, then double counting must be avoided. The chosen measurement units must also be quantifiable at the national level.

Fortunately, economists have at their disposal a wide range of peer reviewed methods for doing so. While the field of ecosystem service valuation is quite new and still evolving, it nevertheless has progressed to the point where it can be demonstrated at a larger scale as indicated by the UNEP recent report on The Economics of Ecosystems and Biodiversity. The pros and cons of various valuation approaches will need to be carefully weighed to avoid under or over valuing services and risking the credibility of the entire effort.

Will this solve the ecosystem degradation problem?

National ecosystem accounts are a good start. But putting a value on ecosystem services at the national level will not guarantee changes in the way ecosystems are managed in the myriad of sub-national decisions that determine their fate. For example, creating aquacultures versus conserving mangroves; building levies and dams versus sustaining wetlands; creating palm oil plantations in place of tropical rainforest. This will require stronger governance systems, policies that protect ecosystems, reforming subsidy programs, eliminating perverse incentives and the use of other incentives to sustain rather than degrade ecosystems.

A recent WRI report, Banking on Nature’s Assets guides policymakers on how to determine priority ecosystem services and then select the most effective policies for sustaining them depending on a country’s capacity and existing laws and policies.

Are any countries already doing this?

A number of efforts are underway to create national indicators of ecosystem health. The UK is conducting a National Ecosystem Assessment of the country’s natural environment in terms of the benefits it provides to society. The results of this could be integrated into national accounts. Emerging initiatives at the global, regional, and national scale are road testing ways to incorporate valuation of natural, built, human, and social capital into measures of national well being and economic sustainability that can be reported side by side with traditional measures such as GDP. Most of these initiatives address natural capital and ecosystem service flows. For example, the U.S. Genuine Progress Indicator includes costs of depleting old growth forests, wetlands, and farmlands in its sustainable economic welfare calculations. The European Commission, United Nations and others are exploring ways to define complementary indicators for GDP that address sustainable development.

What should the World Bank do in its own operations to take into account ecosystems?

In addition to helping countries account for the value of natural assets, the World Bank itself is well positioned to systematically integrate ecosystem risks and opportunities into its own operations. Banking on Nature’s Assets identifies entry points for mainstreaming ecosystem services into the World Bank’s core operations. These range from country assistance strategies and environmental analysis to sector work and development policy loans. The report also presents a range of tools and policy options that the Bank can use to help country partners sustain their precious capital. It concludes with recommendations for scaling up the use of an ecosystem service approach in the World Bank and other MDB’s operations. Eventually, valuation of ecosystem services should become a routine practice in formal benefit-cost analysis of all MDB policies, program, and projects.