Natural Capital

A Small Island Perspective to Natural Capital:Focus on Prince Edward Island

This thesis follows the development of natural capital economic theory. Since the World Bank declared in 1995 that natural capital represents one third of the globe’s financial value, this economic theory of value has grown in importance for all island economies.

A case study of traditional economic indicators (GDP based) on Prince Edward Island reveals a lagging economy unable to reverse the long term decline in economic development outcomes or in the stock of natural capital.

Natural Capital

Introduction

E. O. Wilson’s biophelia hypothesis would propose that the human species has an inborn need for nature which justifies the conservation of nature, both as a social and a biological imperative. “We are human in good part because of the particular way we affiliate with other organisms (Wilson, 1993).”

Wilson postulates that we have created massive change in the environment which is resulting in the largest extinction of species on the planet since the dinosaurs.

In Canada, and in general, throughout the western world contrary commentary suggests that the health of financial markets serves as an indicator of sustainability for the industrialized economy.

“Canada has been blessed with abundant natural resources and these have proved to be resilient. As the data provided here demonstrate—and contrary to the claims of alarmists — environmental conditions today are better than they have been in decades” (Diane Katz, The Frazer Forum 2009, p. 12).

In theory, our natural environment can be referred to as a stock of natural capital. Although the value of nature in our economy is more than just a financial calculation based in GDP measures, additional measures are more difficult to quantify.

One of the best examples of this difficulty in measurement is that of the Gulf of Mexico oil spill. This event generated an increase in economic activity and actually represented GDP growth. It did so at a great cost to our stock of natural capital.

Introduction

Research Methodology

This thesis was designed to isolate elements of natural capital economic theory which would provide the most benefit for economic development on small islands. Research in the natural capital economics reveals that several scientific disciplines are establishing rational approaches to environmental values. The integration of findings in biology, anthropology, sociology, and in ocean and atmospheric sciences, among others, provides additional insight to inform economic development plans. This thesis relies on traditional public sources of economic valuation and measure . I reviewed published sources of statistical information available from the United Nations, Statistics Canada, and the Statistics Division of the Provincial Treasury of Prince Edward Island. This type of baseline economic information is widely regarded as accurate, is respected in many jurisdictions, and has been developed through rigorous work and refinement over the years .Although I argue at times that these classic measures of value are inadequate, and present perverse outcomes of growth, their validity and acceptance in current economic analysis is not in question.

I have examined the development of global financial institutions which enable the continued increase in production of goods and services in global trade. I suggest that findings in natural capital sciences, supported by findings in the social and cultural sciences, provide the theoretical foundation for the integration of natural capital economic theory into island economies. The validity of using the four pillars of sustainable economic development analysis, (social, natural, cultural and financial) as presented in Agenda 21 is supported in this thesis by the financial analysis provided from the World Bank, the U.K. Treasury, statistics from Canadian state agencies, provincial statistical publications and numerous widely published economic journal articles and books (Agenda 21, 1992; NRTEE, 2003, 2009; Statistics Canada, 2001, 2010; PEI 2008, 2009; Stern, 2006; and World Bank, 2004). The economic reports I have reviewed on the value of nature and ecosystem services were rigorous studies commissioned by national governments and international organizations which have taken years, in some cases decades, to compile (IPCC, 2007).

Research Methodology

Nissology

A fundamental premise of natural capital theory is the acceptance of limits to natural resources and limits to growth. The founding definitions of which in global terms were brought forward in the Club of Rome publication of ‘Limits to Growth’ by Roberta Meadows et al in 1972 (Meadows, 1972).Emerging evidence in nissology from studies in biology, physics, economics, psychology, and sociology may provide answers as to why Prince Edward Island’s economy and environment continue to decline. The application of natural capital theories in small scale, closed loop micro-economic production systems has provided promising results for capitalists, but on a macroeconomic scale, success has not immediately apparent.

Nissology provides insights into common island experiences from around the world, and informs economic theory with a multidisciplinary perspective on community economic values which have developed as a result of known geographic limits. Island economies provide opportunities for economic improvements to be, based in science, and grounded in small island social and cultural reality.

Research Questions

Could the application of natural capital economic theory improve the profitability of production systems and therefore increase the value of limited island natural resources?

Bounded as islands are, by sea and sky, the island geographic entity provides quantifiable limits and certain knowledge of the total economic value of nature within those boundaries. Does the finite nature of islands provide an opportunity for the application of micro-economic production models into macro-economic development models?

Can biomimicry be adapted to small island economic theory?

Should the natural laws of science such as the law of thermodynamics and the law of entropy, be incorporated into economic theory and practice?

Natural Capital

Natural resources (timber, energy and minerals) contributed 22% to Canada’s total wealth in 2008. In Prince Edward Island, this relative value is higher because of the traditional reliance on natural resources in the economy.

“We depend on natural capital to provide provisioning services for the supply of food, oxygen, water and building materials. Our natural capital provides critical climate regulation services as well as life supporting services that flow from the living ecosystem. “

(2005) The Millennium Ecosystem Assessment Report, Living Beyond our Means http://www.maweb.org/documents/document.429.aspx.pdf

Measures of Natural Capital

Natural Capital is often measured in terms of biodiversity. The more numerous and diverse are the species in an ecosystem, the more capacity there is in that system to rebound from shocks to the system.

Traditional economic development models convert forest into cropland, rivers into reservoirs, and marshes into parking lots. This conversion does not end all natural processes, but does tend to produce a less diverse landscape excluding many of the species previously occupying the space.

The summary of the Millennium Ecosystem Assessment (MA) is that the stock of natural capital is in decline on a global scale.

Some of the clearest evidence of the pressure we are putting on nature comes from evidence of the decline of wild fish and fresh water; both natural capital assets which were previously thought of as free gifts from nature.

The problem statement in an island context.

The world history of economic development repeats itself in a cycle of population growth, followed by destruction of the environment, resulting in an ecological disaster, and ultimately ending with a population crash.

Ronald Wright describes the historic cycle resulting from the loss of tree cover on islands and in continental situations as a process which eventually leads to the collapse of the underlying agricultural and system and a breakdown of the social order. “Once nature starts to foreclose – with erosion, crop failure, famine, disease – the social contract breaks down” (Wright, 2004, p. 84).

The ‘cultural tradition of avoiding hostility, which is typically found on small islands, is perhaps one illustration of a significant contributing factor to what E.O. Wilson describes as the larger world problem which is a lack of self-understanding and a “Paleolithic” obstinacy to change (Wilson, 2002).

Ecosystem Services flowing from Nature

Nature provides a wide variety of services from a stock of natural capital. Think of these services as similar to interest payments from a stock of financial capital. In a bank account. Just as a stockpile of financial capital is required to return significant interest payments, a stockpile of natural capital is required to return an adequate annual flow of nature services.

Life-supporting natural system services include nutrient cycles, soil formation cycles and primary food production cycles.

Human provisioning services from nature include the delivery of food, water, wood, fiber and fuel.

Regulating services from nature include climate regulation, water purification services, flood and tidal surge regulation as well as disease regulation.

Cultural services from nature are received in aesthetic, spiritual, educational and recreational benefits.

Natural Capital Methods of Measurement

Traditionally, natural capital has been divided into three categories•renewable resources•non-renewable resources •and continuous resources generated from thermodynamics such as tidal, solar, geomagnetic and wind energy.

Natural capital theory now expands these definitions to include among other values•non-use values as well as use (consumption) values•non-marketed values along with marketed values, these could be illustrated by the air we breathe or the water we drink Many non-use and non-marketed values support indispensible contributions to human welfare and the financial economy in built capital, human capital, social capital and natural capital.

Non Use Nature Values part of a total economic value framework

Inter-generational equity values, the sharing of present resources with those we live with.

Intra-generational values, the preservation and passing of natural resource values to future generations.

Bequest values, knowledge that future generations might benefit as we did.

Existence values, derived from that knowledge that something simply exists; i.e.: a polar bear to someone who has never seen one.

Option values exist in the ability to reserve use for a later date yet undiscovered natural capital values such as the elusive cure for an incurable disease in a tropical rainforest.

Natural Capital Law

The law of thermodynamics is a fundamental natural capital law. these natural processes are irreversible.

The first law of thermodynamics is that energy can be transferred from one system to another in many forms, but it cannot be created or destroyed.

The second law of thermodynamics is that natural processes that involve an energy transfer must have one direction which dictates a declining level of energy at each transfer, and that these natural processes are irreversible. Entropy dictates that energy available in a closed loop system only decreases with use

These natural capital laws of science have been described as “immutable, irrevocable, written in stone” (Boyd, 2003, p. 350). This statement of fact is hard to dispute on any grounds, as the Natural Law of Gravity would tend to provide concrete evidence to any contrarian.

2005: Mark Anielski, Sara Wilson. The Pembina Institute. Counting Canada's Natural Capital: Assessing the Real Value of Canada's Boreal Ecosystems

This study examined the ecosystem goods and services provided by Canada's boreal forest region, including water storage and purification, climate regulation, and carbon storage.

The economic value of the non-market services provided by the boreal region is estimated at $93.2 billion per year. By comparison the net market value of resource extraction activities measured in terms of GDP is estimated at $37.8 billion.

The value of the current total carbon stored in Canada's boreal forest is estimated at $3.7 trillion.

Flood control and water filtering services are identified as the most economically significant service provided by the boreal, with an annual value of more than $80 billion per year.

Natural Capital Values in Canada

Prince Edward IslandNatural Capital Measures

2001 – Ken Belcher et al. Ecological Fiscal Reform and agricultural landscapes; case study of Mill River watershed. Ducks Unlimited.

Ecosystem services from agricultural land are valued at $237 per hectare per year.(At a simple 5% rate of return this would indicate a natural capital asset value of $4,740 per hectare.)

2002 - Martha McCulloch et al: Coastal impacts of climate change and sea-level rise on Prince Edward Island, Geological Service of Canada.

Salt marshes are valued in excess of $20,000 per hectare capital value. (At a simple 5% rate of return this would indicate a flow of ecosystem services valued at $1,000 per year.)

Prince Edward IslandNatural Capital Measures

The Province of Prince Edward Island released a ‘State of the Environment Report’ in 2003. This report was the first to publicly quantify environmental quality and was created to contribute to public awareness and allow for informed decision making in all sectors of society.

“The Island’s economic potential is firmly rooted in sectors which rely on natural resources. The quality and sustainability of these resources is critical to agriculture, aquaculture, tourism, forestry and the fishery. It is also an important factor in quality of life for Islanders.”

This report identified measures of natural capital in terms of drinking water quality, surface water quality, climate change, energy use, air quality, biodiversity, pesticide use, waste management, soil quality, land use and environmental stewardship.

What I found.Deterioration in PEI Natural Capital

Water quality has declined. the appearance of nitrates and phosphorus ins surface and ground water is good example.Natural food sources have declined, the loss of species like Atlantic Salmon and Atlantic Cod. There is an increased risk of contamination from chemicals used in manufacturing and agriculture, as well as contaminant discharges from sewage treatment plants and untreated sewage systems.The extirpation of species from PEI, such as the river otter, the pileated woodpecker, the pine martin.The increase in species at risk such as harbour porpoise, fin whale, leather back turtle, striped bass, American eel, winter skate, Atlantic cod and Atlantic Salmon.The deterioration of island forest cover since the arrival of Europeans on PEI.The loss of organic matter content in soils as well as the increase in soil errosion.

What I found.Deterioration in the PEI Economy

Stagnation in employment, unemployment continues to remain over 11% for the last 20 years.

Productivity has stagnated at slightly over 70% of the Canadian average, there has been no change since the Development Plan of the 1970’s when it moved from 55% of the Canadian average.

Health care costs are increasing, government spending on health care continues to outpace increases in GDP economic activity. Health care costs Increase at a rate of 6% annually while the economy is growing at rate of approximately 2%.

Dramatic increases in imports since the connection of the fixed link to the mainland. The provincial trade deficit increases at a rate of 2.5 times the rate of export growth. For every marginal dollar of export earnings, $2.50 is spent on import to create this new product.

What I found.Deterioration in the PEI tourism industry.

Employment creation on the island is dependent on seasonal enterprises which create half of all new jobs in the island economy. Tourism presents a significant economic engine for the island with 10% of total economic activity. There is widespread agreement that the island tourism industry is in decline, and that this decline in visitation is long term and island wide, although it does seem to be more acute in rural areas. The global tourism industry, in contrast, has been growing.

Traditional economic development schemes, have created lower income job opportunities and economic uncertainty for a high percentage of island workers. Small island tourism throughout the world mirrors the decline in tourism visitation to PEI.

Common problems include a lack of job security, advancement, and training opportunities, medical benefits and long term pension plans. Cultural pressures on the island encourage workers to migrate to long term full time employment opportunities, and young people generally do not consider seasonal work to be a viable career option which results in an increasing exodus of youth.

“Once broad goals are democratically arrived at, they can be used to limit and direct preferences at lower levels. For example, once there is general consensus on the goal of sustainability, then society is justified in taking action to change local behaviors that are consistent with this goal. It may be justified, for example, to attempt to change the preferences for driving automobiles, or the price of doing so…” (Carl Folke, Robert Costanza, 1997).

“Where externalities occur, private markets cannot operate efficiently in the context of optimizing social welfare and market failure occurs. Externalities provide the fundamental economic justification for the existence of governments and their provision of public goods not supplied by the private markets” (Barton, 1999, p. 210).

“Ultimately macroeconomics is required to express the value of ecological systems and species in monetary terms. That is, all things that appear in national and international accounts appear with a monetary value or as index that reflects monetary values” (Fenech, 2003, p. 16).

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Rationale for Island Action.

Rationale for Island Action.

The citizenship rationale for action is the nationhood rationale.

The island rational is that Prince Edward Islanders ought to have access to certain key Canadian environmental rights as defined by our constitution, parliamentary law, and international treaty. Since some of these rights fall under provincial jurisdiction, it is imperative that the island province have adequate funds to act within its jurisdictional capacity.

The federal rationale for supporting the improvement of natural capital sustainability in Prince Edward Island is basic. In order for the federal government to full fill its responsibilities to Canadian citizens, Prince Edward Island needs the financial capacity to act in areas of shared federal/provincial jurisdiction.

Conclusions

The underlying premise of natural capital economics is that nature is the primary engine of growth; the laws of nature determine the outcome of any activity. The economy is a subsidiary of the environment.

The case study reveals a declining quality and stock of natural capital present in the environment on Prince Edward Island largely because of the resource exploitation model of economic development in the past. Over the last several decades, despite our best efforts to improve the economy, stagnation continues to be a long term economic trend on Prince Edward Island.

The continuing decline in nature values and the long term stagnation of the Prince Edward Island economy would lead one to the conclusion that the present economic development paradigm (free market business models combined with government regulation) is not working for either nature or the economy.

In fact, it appears, this scenario prevents the island from achieving long-term economic sustainability goals.

It is clear that free markets do not provide an incentive to preserve nature. It should be clear that we must place value on limited natural capital resources. Ecological economics illustrates financial metrics for market mechanisms to function and internalize these values in closed loop micro-economic production systems. These systems are ideally suited to island economies.

Community consultations matter. As capacity is developed in the planning and delivery of community services on a local level, the benefits of economic growth on the island will be shared on a more equitable basis across all sectors of society. There is a high degree of certainty in the effectiveness of this approach to economic development , contributions to participatory democracy will lead to a stronger, more resilient island society.

Habitat restoration opportunities present an immediate opportunity to improve the value of our environment.Biodiversity protection in the working landscape is seen as a necessary first step for the island.

Conclusions

Protected Area Land AssemblyThe identification and preservation of lands which serve as the core of a protected area land use plan will provide ‘biodiversity hotspots’, an important first step for any island to preserve biodiversity.

Ecological Tax Reform.Stop counting the consumption of natural capital as income, tax labour and income less and tax resource use more, maximise the productivity of natural capital in the short run and invest in increasing it’s supply in the long run, and invest in domestic production for domestic markets as the first option.

Establish a Carbon Market.Use carbon sequestration as a proxy for nature preservation. Cap and trade systems have been used successfully in Canada in the past. Cap and trade systems are non-countervailable under international trade laws.

Conclusions

Conclusions

Adapt to Climate Change.Plans for long term sustainability must include the development of alternate locations for the installation and future development of critical public infrastructure.

Initiate Import Replacement Schemes.The lessons learned from the study of small islands is that, as off island remittances grow in importance, cultural and economic independence is diminished.

Photo and Chart Credits

The owl and the oak tree. Personal property of Douglas Deacon

Planet Earth. NASA, http://www.nasa.gov/

Prince Edward Island satellite image.NASA , http://www.nasa.gov/

Gulf of Mexico oil spill. CBS Interactive http://news.cnet.com/8301-17938_105-20003460-1.html

Collapse of the cod fishery. Millennium Eso-sytem Assessment