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Faculty Viewpoints

The Decades-Long Effort to Account for the Value of Natural Resources

GDP puts a value on economic activities, but doesn’t consider whether they are exhausting or replenishing natural resources. Eli Fenichel, Knobloch Family Professor of Natural Resource Economics at the Yale School of the Environment, led efforts to get the government on track to account for the use of natural capital and integrate that data into decision-making.

An aerial photo of a forest with a house in the middle
Valentin Flauraud/AFP via Getty Images)
  • Eli Fenichel
    Knobloch Family Professor of Natural Resource Economics, Yale School of the Environment

Q: You recently returned to Yale after taking a leave to work in the White House Office of Science and Technology Policy, where you led a 27-agency team that developed the National Strategy to Develop Statistics for Environmental-Economic Decisions. What is the National Strategy and why is it important?

First, just to be absolutely clear, I’m speaking as a Yale professor now, not someone representing the administration. My comments reflect how I understand the strategy in my current position.

We know that natural resources, including things like a stable climate, biodiversity, water, soil, wetlands, and forests, are a key part of the country’s economic health. The environment contributes to our national welfare, to our productivity, to our wellbeing. Yet the core national statistical system that produces numbers like the GDP and unemployment doesn’t currently collect environmental data.

The National Strategy to Develop Statistics for Environmental-Economic Decisions is a roadmap to begin accounting for natural capital. Over a 15-year period, the strategy will add environmental data to the U.S. federal balance sheet and eventually develop associated, relevant statistics for decision-making.

Ultimately the goal is to get environmental decision-making onto the same track with economic decision-making. Currently, we treat environment and economics as separate spheres. Once decisions are made in each area, we hope we can work out conflicts after the fact. That isn’t effective or realistic. Instead, the National Strategy aims to provide the information needed to allow for a single, fluid decision-making process.

Q: Would you offer an example of why the change is needed?

After a hurricane or wildfire, GDP goes up in the next quarter. Ecosystems have been damaged or destroyed, yet we’re counting the impacts as positive economic growth. Rebuilding leads to the GDP growth but it’s possible because we are pulling money out of the nation’s savings account. A big part of our savings account comes from our natural resources, and we don’t have a way to track when we’re drawing it down.

We’ve known for a long time that the indicators that we’re currently collecting aren’t useful for some decisions. They don’t give us everything we might want, especially when we think about our natural wealth or our future opportunities.

If we had been accounting for our natural assets all along, we’d probably have seen signals of the economic impacts of climate change much earlier. In fact, the system of national accounts already says we’re supposed to account natural resources under the category of non-produced, non-financial biological assets. We’ve never done that. One part of the National Strategy is simply to produce the data we’ve long said we will.

You can imagine a scenario where we extract and burn a bunch of fossil fuels. That adds to the GDP. Then we spend a bunch of money pulling that carbon out of the atmosphere. That also adds to the GDP. Do we want to depend entirely on an indicator that suggests making a mess and cleaning it up is economic progress?

However, in addition, our ability to observe the earth and its systems has evolved at such a rapid pace over the last decade, even over the last five years. As has our ability to collect and organize data. This effort will provide an incredibly helpful tool for addressing climate change because it enables us to think about how climate impacts work their ways through natural capital.

Hopefully, 15 years from now, we will have a dozen or so classes of natural assets on the balance sheet as core national statistics that are produced at a regular interval so we can understand how our natural wealth is changing over time.

Q: What becomes possible when we have both GDP numbers and natural-capital statistics?

GDP was developed to give us a bird’s-eye view of the economy. But the picture offered by GDP doesn’t tell us whether growth occurred because we were more productive, more creative, and more innovative—things that support future growth—or because we cut down forests, drained wetlands, fished out fish stocks, and burned a lot of coal—things that are, in effect, cashing out assets and could make future growth harder.

You can imagine a scenario where we extract and burn a bunch of fossil fuels. That adds to the GDP. Then we spend a bunch of money pulling that carbon out of the atmosphere. That also adds to the GDP. Do we want to depend entirely on an indicator that suggests making a mess and cleaning it up is economic progress?

If GDP is, in effect, a one-dimensional overview, adding natural-capital statistics could be thought of as providing depth perception. Without natural-capital statistics, we’re missing out on a big signal, and it has become a real concern, particularly if you think about how much the stability of our overall climate matters for future productivity.

Beyond that, climate change and biodiversity loss are such large directional changes that they can no longer be thought of as simple shocks to the system that will get averaged out over time. It’s highly likely that our important economic estimates are becoming biased. Taken all together, the changes in the wealth we hold in nature are large enough that they are affecting broader economic estimates. Without good environment data, we can no longer think about economic issues clearly.

Q: To clarify, the data around natural capital will be information, not a decision.

That is correct. Think about it this way: we talk about GDP all the time, but I can’t think of any decision that hinges completely on GDP. Natural-capital statistics will provide another set of information that speaks to national economic opportunities going forward. It is probably not super correlated with GDP. And it will be valuable to have a set of national statistics that specifically speaks to national resources and the environment. But, again, national statistics are not decisions. However, they are go-to information sets.

Q: How will the data be used?

The goal is to support many different areas of decision-making, ranging from economic policy and sustainable development policy through to regulatory and programmatic decisions of the federal government.

It will also support decisions by regional, state, local, and tribal governments, and other local authorities that are already using national statistical data to do economic planning.

When planners create regional development plans, the models populate their data sets from national account statistics. Currently, to the extent they try to consider the environment, they’re attempting to bolt on an ad hoc, mismatched set of data.

The National Strategy specifically anticipates developing natural-capital data that is aligned with the way we think about economic data. When the environment and economic data going into these models are designed to work together, we wind up with very different decision-making processes.

Q: What about other sectors?

In terms of the private sector and financial markets, there’s a really strong intersection with all of the work that’s happening in ESG. Part of the reason why there are something like 999 different ways of doing ESG right now is that there’s not a national account benchmark. Establishing a national benchmark that clarifies what information to collect and how to organize and report it will help firms assessing and reporting their own natural-capital dependencies, opportunities, and liabilities.

Developing countries have started thinking about what natural-capital accounting could mean for sovereign debt markets. The IMF has been talking a lot about what are called debt-for-nature swaps, basically having countries commit to securing natural capital in exchange for debt relief.

The logical extension of those ideas within the U.S. might be municipal bond markets or potentially even corporate debt markets going forward. When municipalities that are acting to protect their natural resources get better municipal bond rates, that leads to different incentives.

Finally, companies can look at reported natural-capital statistics for thinking about supply-chain risks related to nature.

Q: Would you give some examples?

The food industry is quite concerned about pollinators. There’s also a lot of interest in soil fertility as a capital asset. Companies entering into long-term contracts want to know that farmers are treating the soil in a way that ensures it can keep producing. It’s a supply-chain and sourcing risk. Water is an issue for agriculture, industry, and water utilities.

Again, one of the strengths of the National Strategy is that it recognizes that we need to get all of this organized in a way that’s comparable to the economic data.

Years ago, I wrote a paper looking at the asset value of fish in the Gulf of Mexico. Normally anything having to do with fisheries is very contentious. But since the paper put environmental and economic information into the same frame, a federal regulator, an environmental NGO, and the commercial fisherman’s association all said, “This is exactly what we need.” Once all the decision factors were in the same unit, they all wound up seeing the numbers as credible and useful.

I had a similar experience working on groundwater in Kansas, where some decision makers think about water in a volumetric unit—acre feet or gallons—while others think about it in terms of money. Getting everyone to use the same units allowed for amazingly rich conversations. It wasn’t telling people what they needed to do. It wasn’t saying, “This number’s high or this number’s low.” It was simply letting the different stakeholders speak the same language.

For me, it clicked: this is the value of academic research. By providing information in a way that they hadn’t gotten it before, we helped people who really understand the system innately because they’re in it every day think about their decisions in a more sophisticated way. They could talk productively with people who had a different perspective.

Q: Why will it take 15 years to produce these statistics?

Part of why the plan allows for 15 years is that there’s quite a bit of work to organize all of those data, test it out, and refine it.

To develop the statistic requires bringing people from multiple fields together to effectively backwards engineer the way that natural systems work. The United States is a large country with a lot of very different ecosystems. We want to understand what changes to ecosystems mean for those ecosystems and how that matters for people. We want to get a handle on it in a really deep way so that we can find a finite number of data points to collect and a finite number of statistics to produce that let us effectively integrate environmental and economic decisions.

The goal is to understand the processes of natural systems and their interactions with the economy clearly enough to think about the net present value of future services provided. To get there we have to figure out which ecosystem services to count. Then do we consider just the net present value of future services that involve an actual cash value—a transaction? Or do we also include avoided expenditures? Costs that would arise if the service weren’t there? What about green spaces that are effectively in-kind services? How do those fit?

This work is already happening around specific issues. In the western United States, they’re doing it around water resources. In coastal areas there’s work on changing wetlands and sea-level rise. There’s work on soil, on forests. These are all things that can affect our national economic progress.

With the National Strategy, rather than approach this region by region and problem by problem, we will standardize the way we collect and organize environmental data.

Department: Faculty Viewpoints