Why Monetising Natural Capital Helps The Argument For Public Subsidy

How do you price a tree - and why would you? I've been wrestling with the concept of natural capital1, and how you actually value it for a while. But what is natural capital? To paraphrase the Natural Capital Committee (NCC), it comprises those assets that make up the ecosystem without which human life cannot survive: air, water, soil, plants and so on. It seems to me that there are two principal arguments for placing a monetary value on natural capital assets: first, so that the general public can understand the importance of natural capital, why we must protect it, and the part farming plays in doing so; and second so that government can justify continued subsidies for the farming industry once we leave Europe. Farming is on the front line of environmental management and two particular natural assets - soil and water - are fundamental to food production. If we know what our soil is worth to us, we can place a price on its protection - and pay farmers to look after it.

Public money for the public good

Defra's Health and Harmony consultation on our future, domestic agricultural policy indicates that any continuation of subsidy should be based on the principle of public money for the public good. The consultation's focus on environmental land management schemes tells me that any future agricultural subsidy must deliver enhanced environmental benefits for the wider public good. But in order to calculate how much any future subsidy could be worth, we need to understand the economic value of the natural capital inputs (primarily soil / water) to our agricultural industry. The NCC suggests that this can be done by applying the same principles used to assess the financial value of the inputs and outputs of any other economic activity. In other words, healthy soil, as an input to food production, should have a price tag in the same way that iron ore does in steel production.

'Reform and eliminate perverse subsidies'

As the NCC points out, our natural assets have always been exploited for economic gain resulting in "our natural environment being mismanaged, over-consumed, and underinvested in"; a state of affairs that has worsened significantly over the last 60 years. The NCC recommends a number of different ways of funding the enhancement and protection of our natural capital, through both public and private investment, one of which is to 'reform and eliminate perverse subsidies'. This appears to be the basis of Defra thinking i.e. that the value...