Natural CapitalA Small Island Perspective to Natural Capital: Focus on Prince Edward Island
Natural Capital This thesis follows the development of natural capital economic theory. Since the World Bank declared in 1995 that natural capital represents one third of the globe’s financial value, this economic theory of value has grown in importance for all island economies.A case study of traditionaleconomic indicators (GDP based)on Prince Edward Island revealsa lagging economy unable toreverse the long term decline ineconomic developmentoutcomes or in the stock ofnatural capital.
IntroductionE. O. Wilson’s biophelia hypothesis would propose that the human species has aninborn need for nature which justifies the conservation of nature, both as a socialand a biological imperative. “We are human in good part because of the particularway we affiliate with other organisms (Wilson, 1993).”Wilson postulates that we have created massive change in the environment whichis resulting in the largest extinction of species on the planet since the dinosaurs.In Canada, and in general, throughout the western world contrary commentarysuggests that the health of financial markets serves as an indicator ofsustainability for the industrialized economy.“Canada has been blessed with abundant natural resources and these have provedto be resilient. As the data provided here demonstrate—and contrary to the claimsof alarmists — environmental conditions today are better than they have been indecades” (Diane Katz, The Frazer Forum 2009, p. 12).
IntroductionIn theory, our natural environment can bereferred to as a stock of natural capital.Although the value of nature in oureconomy is more than just a financialcalculation based in GDP measures,additional measures are more difficult toquantify.One of the best examples of this difficulty in measurement is that of the Gulf ofMexico oil spill. This event generated an increase in economic activity and actuallyrepresented GDP growth. It did so at a great cost to our stock of natural capital.
Research MethodologyThis thesis was designed to isolate elements of natural capital economic theory whichwould provide the most benefit for economic development on small islands.Research in the natural capital economics reveals that several scientific disciplines areestablishing rational approaches to environmental values. The integration of findingsin biology, anthropology, sociology, and in ocean and atmospheric sciences, amongothers, provides additional insight to inform economic development plans.This thesis relies on traditional public sources of economic valuation and measure . Ireviewed published sources of statistical information available from the UnitedNations, Statistics Canada, and the Statistics Division of the Provincial Treasury ofPrince Edward Island.This type of baseline economic information is widely regarded as accurate, isrespected in many jurisdictions, and has been developed through rigorous work andrefinement over the years .Although I argue at times that these classic measures of value are inadequate, andpresent perverse outcomes of growth, their validity and acceptance in currenteconomic analysis is not in question.
Research MethodologyI have examined the development of global financial institutions which enable thecontinued increase in production of goods and services in global trade.I suggest that findings in natural capital sciences, supported by findings in the socialand cultural sciences, provide the theoretical foundation for the integration of naturalcapital economic theory into island economies.The validity of using the four pillars of sustainable economic development analysis,(social, natural, cultural and financial) as presented in Agenda 21 is supported in thisthesis by the financial analysis provided from the World Bank, the U.K. Treasury,statistics from Canadian state agencies, provincial statistical publications andnumerous widely published economic journal articles and books (Agenda 21, 1992;NRTEE, 2003, 2009; Statistics Canada, 2001, 2010; PEI 2008, 2009; Stern, 2006; andWorld Bank, 2004).The economic reports I have reviewed on the value of nature and ecosystem serviceswere rigorous studies commissioned by national governments and internationalorganizations which have taken years, in some cases decades, to compile (IPCC, 2007).
NissologyA fundamental premise of natural capital theory is the acceptance of limits to naturalresources and limits to growth. The founding definitions of which in global terms werebrought forward in the Club of Rome publication of ‘Limits to Growth’ by RobertaMeadows et al in 1972 (Meadows, 1972).Emerging evidence in nissology from studies in biology, physics, economics,psychology, and sociology may provide answers as to why Prince Edward Island’seconomy and environment continue to decline.The application of natural capital theories in small scale, closed loop micro-economicproduction systems has provided promising results for capitalists, but on amacroeconomic scale, success has not immediately apparent.Nissology provides insights into common island experiences from around the world,and informs economic theory with a multidisciplinary perspective on communityeconomic values which have developed as a result of known geographic limits.Island economies provide opportunities for economic improvements to be, based inscience, and grounded in small island social and cultural reality.
Research QuestionsCould the application of natural capital economic theory improve the profitability ofproduction systems and therefore increase the value of limited island naturalresources?Bounded as islands are, by sea and sky, the island geographic entity providesquantifiable limits and certain knowledge of the total economic value of nature withinthose boundaries. Does the finite nature of islands provide an opportunity for theapplication of micro-economic production models into macro-economic developmentmodels?Can biomimicry be adapted to small island economic theory?Should the natural laws of science such as the law of thermodynamics and the law ofentropy, be incorporated into economic theory and practice?
Natural CapitalNatural resources (timber, energy and minerals)contributed 22% to Canada’s total wealth in 2008. InPrince Edward Island, this relative value is higherbecause of the traditional reliance on naturalresources in the economy.“We depend on natural capital to provideprovisioning services for the supply of food, oxygen,water and building materials. Our natural capitalprovides critical climate regulation services as well aslife supporting services that flow from the livingecosystem. “ (2005) The Millennium Ecosystem AssessmentReport, Living Beyond our Meanshttp://www.maweb.org/documents/document.429.aspx.pdf
Measures of Natural CapitalNatural Capital is often measured in terms of biodiversity. The more numerous anddiverse are the species in an ecosystem, the more capacity there is in that system torebound from shocks to the system.Traditional economic development models convert forest into cropland, rivers intoreservoirs, and marshes into parking lots. This conversion does not end all naturalprocesses, but does tend to produce a less diverse landscape excluding many of thespecies previously occupying the space.The summary of the Millennium Ecosystem Assessment (MA) is that the stock ofnatural capital is in decline on a global scale.Some of the clearest evidence of the pressure we are putting on nature comes fromevidence of the decline of wild fish and fresh water; both natural capital assets whichwere previously thought of as free gifts from nature.
The problem statement in an island context.The world history of economic development repeats itself in a cycle of populationgrowth, followed by destruction of the environment, resulting in an ecological disaster,and ultimately ending with a population crash.Ronald Wright describes the historic cycle resulting from the loss of tree cover onislands and in continental situations as a process which eventually leads to thecollapse of the underlying agricultural and system and a breakdown of the social order.“Once nature starts to foreclose – with erosion, crop failure, famine, disease – thesocial contract breaks down” (Wright, 2004, p. 84).The ‘cultural tradition of avoiding hostility, which is typically found on small islands, isperhaps one illustration of a significant contributing factor to what E.O. Wilsondescribes as the larger world problem which is a lack of self-understanding and a“Paleolithic” obstinacy to change (Wilson, 2002).
Ecosystem Services flowing from NatureNature provides a wide variety of services from a stock of natural capital.Think of these services as similar to interest payments from a stock of financial capital.In a bank account. Just as a stockpile of financial capital is required to returnsignificant interest payments, a stockpile of natural capital is required to return anadequate annual flow of nature services.Life-supporting natural system services include nutrient cycles, soil formation cyclesand primary food production cycles.Human provisioning services from nature include the delivery of food, water, wood,fiber and fuel.Regulating services from nature include climate regulation, water purification services,flood and tidal surge regulation as well as disease regulation.Cultural services from nature are received in aesthetic, spiritual, educational andrecreational benefits.
Natural Capital Methods of MeasurementTraditionally, natural capital has been divided into three categories• renewable resources• non-renewable resources• and continuous resources generated from thermodynamics such as tidal, solar, geomagnetic and wind energy.Natural capital theory now expands these definitions to include among other values• non-use values as well as use (consumption) values• non-marketed values along with marketed values, these could be illustrated by the air we breathe or the water we drinkMany non-use and non-marketed values support indispensible contributions tohuman welfare and the financial economy in built capital, human capital, social capitaland natural capital.
Non Use Nature Values part of a total economic value frameworkInter-generational equity values, the sharing of present resources with those we live with.Intra-generational values, the preservation and passing of natural resource values to future generations.Bequest values, knowledge that future generations might benefit as we did.Existence values, derived from that knowledge that something simply exists; i.e.: a polar bear to someone who has never seen one.Option values exist in the ability to reserve use for a later date yet undiscovered natural capital values such as the elusive cure for an incurable disease in a tropical rainforest.
Natural Capital LawThe law of thermodynamics is a fundamental natural capital law. these naturalprocesses are irreversible.The first law of thermodynamics is that energy can be transferred from one system toanother in many forms, but it cannot be created or destroyed.The second law of thermodynamics is that natural processes that involve an energytransfer must have one direction which dictates a declining level of energy at eachtransfer, and that these natural processes are irreversible. Entropy dictates that energyavailable in a closed loop system only decreases with useThese natural capital laws of science have been described as “immutable, irrevocable,written in stone” (Boyd, 2003, p. 350). This statement of fact is hard to dispute on anygrounds, as the Natural Law of Gravity would tend to provide concrete evidence to anycontrarian.
Natural Capital Values in Canada2005: Mark Anielski, Sara Wilson. The Pembina Institute. Counting CanadasNatural Capital: Assessing the Real Value of Canadas Boreal EcosystemsThis study examined the ecosystem goods and services provided by Canadasboreal forest region, including water storage and purification, climateregulation, and carbon storage.The economic value of the non-market services provided by the boreal regionis estimated at $93.2 billion per year. By comparison the net market value ofresource extraction activities measured in terms of GDP is estimated at $37.8billion.The value of the current total carbon stored in Canadas boreal forest isestimated at $3.7 trillion.Flood control and water filtering services are identified as the mosteconomically significant service provided by the boreal, with an annual valueof more than $80 billion per year.
Prince Edward Island Natural Capital Measures2001 – Ken Belcher et al. Ecological Fiscal Reform and agricultural landscapes;case study of Mill River watershed. Ducks Unlimited.Ecosystem services from agricultural land are valued at $237 per hectare per year.(At a simple 5% rate of return this would indicate a natural capital asset value of$4,740 per hectare.)2002 - Martha McCulloch et al: Coastal impacts of climate change and sea-levelrise on Prince Edward Island, Geological Service of Canada.Salt marshes are valued in excess of $20,000 per hectare capital value.(At a simple 5% rate of return this would indicate a flow of ecosystem servicesvalued at $1,000 per year.)
Prince Edward Island Natural Capital MeasuresThe Province of Prince Edward Island released a ‘State of the EnvironmentReport’ in 2003. This report was the first to publicly quantify environmentalquality and was created to contribute to public awareness and allow forinformed decision making in all sectors of society.“The Island’s economic potential is firmly rooted in sectors which rely onnatural resources. The quality and sustainability of these resources is criticalto agriculture, aquaculture, tourism, forestry and the fishery. It is also animportant factor in quality of life for Islanders.”This report identified measures of natural capital in terms of drinking waterquality, surface water quality, climate change, energy use, air quality,biodiversity, pesticide use, waste management, soil quality, land use andenvironmental stewardship.
What I found. Deterioration in PEI Natural CapitalWater quality has declined. the appearance of nitrates and phosphorus ins surface andground water is good example.Natural food sources have declined, the loss of species like Atlantic Salmon andAtlantic Cod.There is an increased risk of contamination from chemicals used in manufacturing andagriculture, as well as contaminant discharges from sewage treatment plants anduntreated sewage systems.The extirpation of species from PEI, such as the river otter, the pileated woodpecker,the pine martin.The increase in species at risk such as harbour porpoise, fin whale, leather back turtle,striped bass, American eel, winter skate, Atlantic cod and Atlantic Salmon.The deterioration of island forest cover since the arrival of Europeans on PEI.The loss of organic matter content in soils as well as the increase in soil errosion.
What I found. Deterioration in the PEI EconomyStagnation in employment, unemployment continues to remain over 11% for the last20 years.Productivity has stagnated at slightly over 70% of the Canadian average, there hasbeen no change since the Development Plan of the 1970’s when it moved from 55% ofthe Canadian average.Health care costs are increasing, government spending on health care continues tooutpace increases in GDP economic activity. Health care costs Increase at a rate of 6%annually while the economy is growing at rate of approximately 2%.Dramatic increases in imports since the connection of the fixed link to the mainland.The provincial trade deficit increases at a rate of 2.5 times the rate of export growth.For every marginal dollar of export earnings, $2.50 is spent on import to create thisnew product.
What I found. Deterioration in the PEI tourism industry.Employment creation on the island is dependent on seasonal enterprises which createhalf of all new jobs in the island economy. Tourism presents a significant economicengine for the island with 10% of total economic activity. There is widespreadagreement that the island tourism industry is in decline, and that this decline invisitation is long term and island wide, although it does seem to be more acute in ruralareas. The global tourism industry, in contrast, has been growing.Traditional economic development schemes, have created lower income jobopportunities and economic uncertainty for a high percentage of island workers. Smallisland tourism throughout the world mirrors the decline in tourism visitation to PEI.Common problems include a lack of job security, advancement, and trainingopportunities, medical benefits and long term pension plans. Cultural pressures on theisland encourage workers to migrate to long term full time employment opportunities,and young people generally do not consider seasonal work to be a viable careeroption which results in an increasing exodus of youth.
Rationale for Island Action.“Once broad goals are democratically arrived at, they can be used to limit anddirect preferences at lower levels. For example, once there is general consensuson the goal of sustainability, then society is justified in taking action to changelocal behaviors that are consistent with this goal. It may be justified, forexample, to attempt to change the preferences for driving automobiles, or theprice of doing so…” (Carl Folke, Robert Costanza, 1997).“Where externalities occur, private markets cannot operate efficiently in thecontext of optimizing social welfare and market failure occurs. Externalitiesprovide the fundamental economic justification for the existence of governmentsand their provision of public goods not supplied by the private markets” (Barton,1999, p. 210). “Ultimately macroeconomics is required to express the value of ecologicalsystems and species in monetary terms. That is, all things that appear innational and international accounts appear with a monetary value or as indexthat reflects monetary values” (Fenech, 2003, p. 16).
Rationale for Island Action.The citizenship rationale for action is the nationhood rationale.The island rational is that Prince Edward Islanders ought to have access tocertain key Canadian environmental rights as defined by our constitution,parliamentary law, and international treaty. Since some of these rights fallunder provincial jurisdiction, it is imperative that the island province haveadequate funds to act within its jurisdictional capacity.The federal rationale for supporting the improvement of natural capitalsustainability in Prince Edward Island is basic. In order for the federalgovernment to full fill its responsibilities to Canadian citizens, Prince EdwardIsland needs the financial capacity to act in areas of shared federal/provincialjurisdiction.
ConclusionsThe underlying premise of natural capital economics is that nature is the primaryengine of growth; the laws of nature determine the outcome of any activity. Theeconomy is a subsidiary of the environment.The case study reveals a declining quality and stock of natural capital present in theenvironment on Prince Edward Island largely because of the resource exploitationmodel of economic development in the past. Over the last several decades, despiteour best efforts to improve the economy, stagnation continues to be a long termeconomic trend on Prince Edward Island.The continuing decline in nature values and the long term stagnation of the PrinceEdward Island economy would lead one to the conclusion that the present economicdevelopment paradigm (free market business models combined with governmentregulation) is not working for either nature or the economy.In fact, it appears, this scenario prevents the island from achieving long-termeconomic sustainability goals.
ConclusionsIt is clear that free markets do not provide an incentive to preserve nature.It should be clear that we must place value on limited natural capital resources.Ecological economics illustrates financial metrics for market mechanisms to functionand internalize these values in closed loop micro-economic production systems. Thesesystems are ideally suited to island economies.Community consultations matter.As capacity is developed in the planning and delivery of community services on a locallevel, the benefits of economic growth on the island will be shared on a moreequitable basis across all sectors of society. There is a high degree of certainty in theeffectiveness of this approach to economic development , contributions toparticipatory democracy will lead to a stronger, more resilient island society.Habitat restoration opportunities present an immediate opportunity to improve thevalue of our environment.Biodiversity protection in the working landscape is seen as a necessary first step forthe island.
ConclusionsProtected Area Land AssemblyThe identification and preservation of lands which serve as the core of a protectedarea land use plan will provide ‘biodiversity hotspots’, an important first step for anyisland to preserve biodiversity.Ecological Tax Reform.Stop counting the consumption of natural capital as income, tax labour and incomeless and tax resource use more, maximise the productivity of natural capital in theshort run and invest in increasing it’s supply in the long run, and invest in domesticproduction for domestic markets as the first option.Establish a Carbon Market.Use carbon sequestration as a proxy for nature preservation. Cap and trade systemshave been used successfully in Canada in the past. Cap and trade systems are non-countervailable under international trade laws.
ConclusionsAdapt to Climate Change.Plans for long term sustainability must include the development of alternate locationsfor the installation and future development of critical public infrastructure.Initiate Import Replacement Schemes.The lessons learned from the study of small islands is that, as off island remittancesgrow in importance, cultural and economic independence is diminished.
Photo and Chart CreditsThe owl and the oak tree. Personal property of Douglas DeaconPlanet Earth. NASA, http://www.nasa.gov/Prince Edward Island satellite image. NASA , http://www.nasa.gov/Gulf of Mexico oil spill. CBS Interactive http://news.cnet.com/8301-17938_105-20003460-1.htmlCollapse of the cod fishery. Millennium Eso-sytem Assessment