UK: Why Monetising Natural Capital Helps The Argument For Public Subsidy

Last Updated: 22 May 2018
Article by Paul Rice

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 of future farming subsidies should reflect the inherent worth of natural capital assets used by farmers, and the subsidy amount should depend on how well farmers manage those assets.

Natural capital investment priorities

The Office for National Statistics has the unenviable task of placing a financial value on our natural capital assets and this is still a work in progress. In the meantime the NCC has carried out a detailed assessment of our natural capital and has listed nine investment priorities, of which five have a proven economic return (including intertidal habitats and peatland – neither of which, of course, are of immediate concern in the Midlands), and four others (including 'improving the environmental performance of farming') which require more evidence to prove their economic worth and thus feed into the decision making process around subsidy levels. The NCC is building on work already done by various bodies. For instance in 2015 the Woodland Trust estimated the value of carbon dioxide locked up in UK woodlands was c.£16,000 per acre, and Defra puts the value of pollination to UK agriculture at £440m a year.

Making the public case for subsidy

Educating the public about the criticality of natural capital to their own health and well-being, and its importance as an essential input for farming, is necessary for arguing the case for continuing public subsidy. Putting a price on improving farming's environmental performance in order to arrive at a meaningful subsidy level should provide the necessary transparency. Calculating the economic worth of natural capital inputs into a farming operation provides an opportunity to justify such expenditure in a language the public understand. One might argue that monetising natural capital within a recognisable economic framework helps to contextualise something which is otherwise taken for granted. However, all that being said, the valuations are likely to be nuanced – the NCC notes that the amenity value of woodland close to an urban centre is higher than say, woodland in the middle of a rural county – although the carbon capture properties of both would be similar.

Farmers understand intrinsic value of natural capital

Although soil and water are critical to any farming operation, other natural capital assets such as habitat, wildlife and biodiversity are equally intrinsic. It is important that the government, in its calculations and justifications, does not overlook the tremendous amount of voluntary investment in improving the environment already being undertaken by a large number of farmers. A recent survey by the Campaign for the Farmed Environment, which sought to uncover the extent of environmental improvements carried out by farmers, discovered that the vast majority were involved in some form of environmental enhancement outside the countryside stewardship schemes. For every farmer being paid to sow pollen / nectar mix, another one is doing the same without the payment; twice as many arable farmers are providing supplementary bird feeding, and four times that number are sowing catch and cover crops. This proves that farmers do understand the importance of natural capital (although not necessarily its value in raw monetary terms), that there is a strong appetite for an improved, simplified agri-environmental scheme, and that better financial support would encourage further, beneficial changes.

Collaborative investment for local schemes

There is no doubt that the redrawing of the subsidy landscape is helping to focus minds and encouraging groups around the country to explore innovative ways of helping farming become independent of government. One such project, reported in Farmers' Weekly, is Exmoor Ambition, a collaboration between the Exmoor Hill Farming Network, local business, and the local community with the aim of producing a single, locally-delivered payment scheme described as 'having the concept of natural capital at its heart'. Exmoor is also the site of a joint investment project between South West Water and farmers, and referenced in the NCC's third report. SWW is investing to help farmers manage the land so that pollutant run off is curtailed. This has led to cost savings for both farmers (reduced inputs) and the water company (reduced treatment costs) with the net result of cleaner rivers. Giving natural capital a financial value everyone can understand may provide the intellectual basis for future subsidy but, fundamentally, allowing communities to work out the right solution for their particular circumstances, with investment from a consortium of public and private interested parties may be the future.

Footnotes

[1] The Natural Capital Committee (NCC) defines natural capital as "those elements of the natural environment which provide valuable goods and services to people, such as the stock of forests, water, land, minerals and oceans".

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