Ep 20 – Stephen Polasky on Natural Capital

Dr. Stephen Polasky is one of the leaders of the Natural Capital Project’s environmental service mapping and valuation effort. At the University of Minnesota, Steve Polasky holds the Fesler-Lampert Chair in Ecological/Environmental Economics. His research interests include biodiversity conservation, environmental services, integrating ecological and economic analysis, renewable energy, and game theory.

He was the senior staff economist for environment and resources for the President’s Council of Economic Advisers from 1998-1999, and served as associate editor and co-editor for the Journal of Environmental Economics and Management from 1996 to 2002. Today he’s a member of the Environmental Economics Advisory Committee and the Committee on Valuing the Protection of Ecological Systems and Services for the Science Advisory Board of U.S. EPA and a member of The Nature Conservancy’s Science Council.

Below, we share a condensed summary of the discussion. Please listen to the full podcast for more detail.

Don Shelby: Describe, Professor, what we mean by ‘natural capital’.

Dr. Stephen Polasky: Nature does a lot of things for us. We can think about an ecosystem that stores carbon and provides value that way, or cleans the air or water. You can think of natural capital like we would other kinds of capital assets. We can think about an ecosystem that stores carbon or cleans the air or purifies the water. The fact that Nature does this means we can think of it as capital. We have lots of other forms of capital, which we value, but we don’t do that for Nature, even though it provides the essentials for life? 

China has developed a system of accounts that parallel the set of accounts that make up GDP, called Gross Ecosystem Product (GEP). They’re trying to put on the same playing field the benefits of Nature, alongside conventionally measured goods and services.

Businesses are also tremendously receptive. On the climate side, people are much more aware of their carbon footprint. There’s work underway to think about natural climate solutions. How can we store more carbon or release less carbon from ecosystems, by how we manage it? So, people are talking about regenerative agriculture to increase the amount of carbon that’s in the soil. Compared to when we started, these are tremendous strides forward. On the downside, the economy keeps growing, so the speed and scale of action is still not sufficient to counter the threats.

Joe Robertson: It’s been said that a definition of Ecosystem Services might be the goods and services produced by ecosystems for the benefit of humankind, but are there other kinds of services that are less directly evident, less easily traceable, that ultimately could add up to more value, that we also need to start thinking about how to capture, how to measure?

Dr. Polasky: Yes, absolutely. One of the concerns now is that by just measuring the things that we know enough about and can capture now, that we’re just seeing the tip of the iceberg. By just looking at those values, people may say “Well, that’s not so large. We may not know, if we pull a thread in one part of the ecosystem, how does that eventually lead to changes in the way that ecosystem functions… the one thing that is certain is there will be changes in the values, in the future.

Joe: Is natural capital, and natural capital accounting, part of the future of national fiscal policy, banking and insurance companies, and their efforts to assess and to avoid risk?

Dr. Polasky: It should be. This is furthest along with insurance and reinsurance companies. For instance, with coastal resilience and sea-level rise. They’re also interested in ecosystem changes along the coasts: are the coral reefs changing, or seagrass beds changing, because those can provide protection, dampen waves, if there are wetlands between you and the open ocean, that can dampen the impact of incoming storms.

It’s just starting. It’s not mature enough in many instances, or it just hasn’t penetrated fully into business.

Don: The world has been in a cycle for nearly two centuries of taking from Nature, making something from Nature, consuming that product, disposing of it. How long can this go on if natural systems are already severely depleted?

Dr. Polasky: This is the thing that keeps me going. I worked on the Intergovernmental Platform on Biodiversity and Ecosystem Services assessment that was recently put out. We were looking at ecosystem services globally, and trends over the last 50 years. The trends in every area were down. The only thing that was up was agricultural production, which is related to why other things are going down. We convert a lot of natural habitats into agricultural ecosystems for our benefit, for food benefits, but to the detriment of water quality and biodiversity.

We literally are playing with fire. The more we push the systems out of where we’ve got historical experience, the more likely it is we’ll see surprises that may have unpleasant consequences for us.

Don: There are many ways we value Nature. We go out and catch a fish, and we eat it. That is a kind of service we can value. But it is hard to communicate with people who are not seeing indirect benefits or values. How do you convince people in a board room that they have to look at these things and take it into account in their accounting processes?

Dr. Polasky: There’s two difficulties. One is that the impacts of an action are separated in time and space. For instance, a farmer in Minnesota puts nitrogen fertilizer on their corn crop. Some of that nitrogen ends up in the corn, which is where we want it. Some of it ends up in water that goes downstream, goes into groundwater, and changes the nitrogen concentration in the groundwater, and ends up polluting their wells; some of it flows down the Mississippi River, and flows into the Gulf of Mexico.

We need to have the link between actions that are done here in Minnesota, at the upper end of the watershed, all the way down to the Gulf of Mexico, where that excess nutrient may help form and expand the dead zone, the hypoxic zone, which causes damages to fishing interests down there. Part of this is tying the threads together. You’ve done something here at this time, and that has led to this chain of events, which has caused damages that are occurring far away in time and place.

The other is in terms of policy. Economists talk about “externalities”, which is, maybe I take an action and it harms you, but I don’t have to pay for it. So, does the farmer, except out of the goodness of their heart, have to pay for the damages to the fishermen in the Gulf of Mexico. We have to have a way to not only value this, but literally bring it into the accounting and incentives system that business face.

A clear example of how to do this is a carbon tax: You emit carbon, you pay a price for it. It gets internalized into the company, and they have a monetary incentive to reduce pollution. We should reward people for actions that increase natural capital and the services that come from that increase in natural capital.

Joe: You mentioned watersheds, and the connections between farming upstream and what happens further downstream. Is another way to not only value natural capital, but also incentivize accountability, to draw those connections, tie those threads together as you said, and then find new ways of financing shared interest and shared responsibility? If a farmer upstream were to use cleaner practices, it would make the cost of clean water systems downstream or the cost of protecting Nature downstream much less. It might make farmland more productive if regenerative practices were brought in, so there’s shared interest. Does that fall into the landscape of possibility in terms of investing in natural capital?

Dr. Polasky: Absolutely. There is a shared interest here. All throughout Latin America, there are programs called water funds. The first one that really got going was in Quito, Ecuador. What Quito realized was that if they protected the headwaters of the streams and rivers that provide their municipal water supply, they wouldn’t have to spend so much money downstream cleaning up to provide clean drinking water to the people of Quito. So, they negotiated with the people upstream to undertake land management practices that would keep the water clean.

This had benefits all around. The people upstream were getting some investment to keep their natural capital. The people downstream were benefiting because it was far cheaper to do this kind of investment than it would be to invest in a water treatment plant to clean up what had been fouled. You have to figure out how to bring people together to figure out a better way to run the system.

From an economic point, we’re being inefficient. We’re doing things that are destroying value. If we can tie these threads together and bring the producers of ecosystem services together with the people who benefit from them, then we can end up with a situation where all sides are improved in the outcomes.