Natural (Environmental) and Social Capital

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Definition

Capital is traditionally defined as produced (manufactured) means of production. A more functional definition of capital is a fund or a stock (a fishery or forest, an oil well, or a set of machines in a factory) that yields a (sustainable or unsustainable) flow of valuable goods or services into the future. What is functionally important is the relation of a fund or a stock yielding a flow – whether the fund or stock is manufactured or natural is in this view a distinction between kinds of capital and and not a defining characteristic of capital itself (Costanza and Daly, 1992:38).

Types of capital

Based on the above definition Costanza and Daly distinguish three broad types of capital: natural, human and manufactured, ―which correspond roughly to the traditional economic factors of land, labour and capital‖ (Costanza and Daly, 1992:38).

Natural capital are the natural ecosystems that yield a flow of valuable ecosystem goods or services into the future (Costanza, 2008) For example, a population of trees or fish provides a flow or annual yield of new trees or fish, a flow that can be sustainable year after year. The sustainable flow is ―natural income‖; it is the yield from ―natural capital‖. Natural capital may also provide services such as recycling waste materials, or water catchment and erosion control, which are also counted as natural income. Since the flow of services from ecosystems requires that they function as whole systems, the structure and diversity of the system is an important component in natural capital (Costanza and Daly, 1992:38).

Costanza and Daly point out the distinction between natural capital and income and natural resources and find the following definition most appropriate ―natural capital and natural income are aggregates of natural resources in their separate stock and flow dimensions, and forming these aggregates requires some relative valuation of the different types of natural resource stocks and flows.‖ So ―capital and income have distinct evaluative connotations relative to the more physical connotations of the term ‗resources‘‖ (Costanza and Daly, 1992:38).

They differentiate two broad types of natural capital: (1) renewable or active natural capital, and (2) non-renewable or inactive natural capital (―Funds‖ and ―Stocks‖ in Georgescu-Roegen‘s terminology). Renewable natural capital is active and self-maintaining using solar energy (e.g. ecosystems). Ecosystems can be harvested to yield ecosystem goods (e.g. wood) but they also yield a flow of ecosystem services when left in place (e.g. erosion control, carbon capture, recreation). Non-renewable natural capital is more passive (e.g. fossil fuel and mineral deposits) and yields no service until extracted (Costanza and Daly, 1992).

In addition to natural capital there is human-made capital. Here they distinguish between (1) manufactured capital such as factories, buildings, tools and other physical artefacts, and (2) human capital i.e. the stock of education, skills, culture, and knowledge stored in human beings. Agricultural seeds have been selected by humans for thousands of years, they require human knowledge to be used.

Manufactured, human and renewable natural capital decay at substantial rates and must be maintained and replenished continuously. The stock of non-renewable natural capital also decays but at a very slow pace so this can be ignored, however once it is extracted and used it is gone. Renewable natural capital produces both ecosystem goods and services, and renews itself using its own capital stock and solar energy. Excessive harvest of ecosystem goods can reduce renewable natural capital‘s ability to produce services and to maintain itself. Manufactured capital, renewable natural capital and non-renewable natural capital interact with human capital and economic demand to determine the level of marketed goods and service production. (Costanza and Daly, 1992). Much of the discussion on Sustainability in ecological economics revolves around the issue of the limits to substitution between the different forms of capital. For instance, can manufactured capital be substituted for natural capital (can a larger fleet of fishing boats substitute for scarcity of tuna fish)?

Goodwin differentiates between five kinds of capital: financial, natural, produced, human, and social. All are stocks that have the capacity to produce flows of economically desirable outputs, their maintenance being ―essential for the sustainability of economic development‖ (Goodwin, 2007). Financial capital refers to system of ownership or control of physical capital. It facilitates economic production but is not itself productive. Natural capital is made up of the resources and ecosystem services of the natural world. Produced capital is made up of physical assets generated by applying human productive activities to natural capital and capable of providing a flow of goods or services. Human capital refers to the productive capacities of an individual, both inherited and acquired through education and training, while social capital, consists of a stock of trust, mutual understanding, shared values and socially held knowledge. However not all capital can be classified clearly into only one form. E.g., when people deliberately create stocks of new seeds through selective breeding, such seeds may be seen as partly natural and partly produced – and also as embodying human and social knowledge (Goodwin, 2007).

Elaborating on natural and social capital Goodwin states: ―It was from a largely homocentric point of view that economists first began to label stocks of clean water and air, as well as forests, fisheries, and the ever evolving systems that support them – and us – as natural capital. While the term was originally used only for those aspects of nature that humans were actually using – and especially the parts that they were depleting, such as fertile topsoil – growing awareness of the intricacy and delicate balance of the relationship between the natural environment and human economies is encouraging many to think of our total natural environment as precious natural capital‖ (Goodwin, 2007).

Social Capital Today

According to Goodwin (2007) in present-day industrialized economies, recognition of social capital by economists is fairly recent, and has been strengthened by ―the observation that variations in social capital across communities and societies can help to explain some of the differences in their economic development‖(Goodwin, 2007). Social capital now frequently refers to those characteristics of a society that encourage cooperation among groups of people (e.g., workers and managers) whose joint, interdependent efforts are needed to achieve a common goal such as efficient production. Studies suggest that strong norms of reciprocity lead people to trust and to help one another, and that dense networks of civic participation encourage people to engage in mutually beneficial efforts rather than seeking only to gain individual advantage at the possible expense of others. Social capital furthermore, resembles other forms of capital in that it generates a service that enhances the output obtainable from other inputs, without itself being used up in the process of production. (Goodwin, 2007). To understand the notion of social capital, we must refer to institutions.

References

  • Costanza, R. and Daly, H., E. (1992): Natural Capital and Sustainable Development. Conservation Biology 6(1), pp.37-46.
  • Costanza, R. (Lead Author), Cleveland, C., J. (Topic Editor) (2008): Natural capital. In: Encyclopedia of Earth. In: Cleveland, C., J. (Eds), Encyclopedia of Earth [online] URL: http://www.eoearth.org/article/Natural_capital [First published in the Encyclopedia of Earth February 26, 2007; Last revised July 31, 2008; Retrieved February 4, 2010].
  • Goodwin, N. (Lead Author), Global Development and Environment Institute (Content Partner) and Cleveland, C., J. (Topic Editor) (2007): Capital. In: Cleveland, C., J. (Eds), Encyclopedia of Earth [online] URL: http://www.eoearth.org/article%20/Capital [First published in the Encyclopedia of Earth April 1, 2007; Last revised October 9, 2007; Retrieved January 14, 2010]

53. Natural Capital Depletion Tax

Background

Natural capital refers to the land, air, water, living organisms and all formations of the earth biosphere that provide us with ecosystem goods and services required for survival and well-being. It is also the basis for all human economic activity. It comprises renewable resources and also exhaustible stocks on fossil fuels and minerals. We should be taxing what we want less of (like pollution or depletion of finite natural resources)?

Manufactured and human capital has traditionally been measured to calculate economic performance while natural capital has always been neglected, leading to loss of resources, the degradation of natural environments and the loss of valuable ecosystem services. Sustainability requires maintaining natural capital intact, or at least it requires to slow down its loss while waiting for positive technological changes and peak human population. In order to achieve this, an economic instrument to encourage the conservation of natural capital would be useful. One possibility is a natural capital depletion tax.

A proposed tax reform

Developed by ecological economists Robert Costanza and Herman Daly, executive and author Paul Hawken, and ecologist John Woodwell (1995,1998), their ―ecological tax reform‖ proposal calls for a revenue neutral tax shift. In other words, it would not add to the total tax burden, and would even be compatible with tax reduction, but it would radically shift the target of taxation and replace much current income tax (and also taxes on labour in the form of social security contributions) with a "natural capital depletion tax".

The aim of the proposed tax reform is to provide incentives to use natural resources and ecosystems (natural capital) in a sustainable way. Consumption of natural capital would be taxed to the extent that materials are not recycled, encouraging "closed loop" use to the possible extent. For example, the use of fossil energy (which of course cannot be recycled) would be taxed but might be offset with credits for investment in renewable alternatives. This provision would encourage the development of energy efficient technology and renewable sources of energy.

According to the authors, shifting the tax burden from income (and labour) to pollution and depletion would benefit both the economy and the environment by encouraging employment and income, reducing the need for government regulation, and promoting the sustainable use of natural resources and ecosystems. The revenue neutral aspect of the tax shift would not raise costs for business, rather offering businesses appropriate incentives to develop new technologies, improving production efficiency and environmental performance.

Moreover, since the natural capital depletion tax would be applied mainly at the input side of the economy, the tax would pass through the whole system, influencing the prices of all goods and services that consumed natural capital, either directly or indirectly. This would encourage the development of products that do not consume natural capital, which would then have a competitive advantage in the marketplace and tend to displace their non-sustainable alternatives.

Winners and Losers

As often with tax reform proposals, there would be both winners and losers. Extractive industries for instance would probably be directly affected. Companies able to adapt however, would find new opportunities, and thus profits. In addition, because any consumption or value added tax has a regressive character, income transfers or other protections might be necessary to prevent the tax burden from falling too heavily on the poor. The Natural Capital Depletion Tax would particularly favour the raw materials exporting countries or regions.

Difficulties in implementation

The real strength of the proposal for a natural capital depletion tax is its potential to align a powerful economic tool with the physical reality of the world we inhabit. However most governments are reluctant to impose such taxes, particularly for fear of political unpopularity and damaging national competitiveness. Instead many countries in Latin America and Africa are forced to export cheap raw materials by the burden of the payments of the external debts, while industrial countries are emphasising policies of energy efficiency achieved through technological means (such as labelling, standards and best practice schemes), and deregulation of national fuel industries to bring about more competitive markets. These measures in industrial countries ironically are likely to create a rebound effect whereby lower energy prices lead to greater energy consumption, and increased economic growth.

The concept of natural capital depletion tax is problematic in that it is hard to see how the tax level could be rationally set when the total volume and accessibility or recoverability of a resource is unknown. As an example, the penalty level and urgency level of conservation is very different if the depletion rate appears to be 10%, 0.1% or 0.001% of the total resource per year. We are approaching peak oil and later peak gas. Proven reserves are depleted to a few decades-worth of production. Extraction should be taxed but then the rate of prospecting for other sources such as coal will increase until the companies feel secure again. The limits of exploiting living resources of the sea are perhaps more apparent, but procedures such as aquaculture and fertilising the sea may radically change equations and assumptions.

There is the also the matter of implementation: a system of natural capital depletion taxes would require an international agreement or cartels (such as OPEC) to prevent free market access to resources from countries with no natural capital depletion taxes.

References

  • Costanza, R., Daly H., Hawken P. and Woodwell, J., 1995. "Non-partisan ecological tax reform: a win-win proposal that is economically efficient, socially equitable, and ecologically sustainable". International Society for Ecological Economics Newsletter, 6:3, pp. 3 and 8.
  • S. Bernow, R. Costanza, H. Daly, R. DeGennaro, D. Erlandson, D. Ferris, P. Hawken, J. A. Horner, J. Lancelot, T. Marx, D. Norland, I. Peters, D. Roodman, C. Schneider, P. Shyamsundar, and J. Woodwell, 1998, Ecological tax reform, BioScience 48:193-196.