Natural Capital Accounting

Why GDP can rise while a country uses up its natural wealth, and how new accounting systems try to measure nature's value.

When a country cuts down its forests or depletes its fisheries and sells the proceeds, GDP goes up. But the country may actually be getting poorer, because it has used up part of its natural wealth. Natural capital accounting tries to fix this blind spot.

What is natural capital?

Natural capital is the stock of natural resources and ecosystems that provide value to people: forests, soils, fisheries, minerals, water, clean air and biodiversity. Like machines and buildings, natural capital can be built up or run down.

The problem with GDP

GDP measures the flow of production in a year. It does not subtract the depletion of natural resources or the damage to ecosystems. A country that sells off its oil reserves or overfishes its waters can show strong GDP growth while its long-term wealth declines.

New accounting systems

The United Nations adopted the System of Environmental-Economic Accounting, or SEEA, as an international statistical standard in 2012, and added an ecosystem accounting framework in 2021. It helps countries measure natural resources and ecosystems alongside traditional economic statistics. Many countries, including India, have produced environmental accounts based on it.

The World Bank’s reports on “The Changing Wealth of Nations” estimate countries’ total wealth, including produced capital, human capital and natural capital. They show that natural capital makes up a large share of wealth in many low-income countries.

The Dasgupta Review

In 2021, a major review commissioned by the UK Treasury and led by economist Partha Dasgupta, The Economics of Biodiversity, argued that humanity’s demands on nature far exceed its capacity to supply them sustainably, and that economies should measure success by inclusive wealth, including nature, not just GDP.

Two countries' accounts

Two countries each report 5 percent GDP growth. One achieves it by expanding manufacturing and services. The other achieves it mostly by clearing forests and selling timber faster than they regrow. Standard GDP figures look identical, but natural capital accounts would show the second country running down its wealth.

Thinking natural capital accounting puts a price on everything in nature

Natural capital accounts often measure physical quantities, like hectares of forest or tonnes of fish, as well as money values. The aim is to make changes in nature visible in economic decisions, not to claim nature is only worth its price.

Key takeaways

GDP does not subtract the depletion of natural resources or ecosystem damage.
Natural capital is the stock of resources and ecosystems that provide value.
The UN's SEEA framework helps countries measure natural capital alongside GDP.
The 2021 Dasgupta Review called for measuring inclusive wealth, including nature.