Sustainable Development, Natural capital and Ecosystem Services

Sustainability (originated from the latin sustinere meaning “to hold up”) is seen as a paradigm for thinking about the future in which environmental, societal, and economic considerations are balanced in the pursuit of an improved quality of life and wellbeing. Sustainable development is then seen as progress embedded in such thinking. Natural capital is increasingly at the center of the policy debate in the context of sustainable development as the idea that it underpins economy and societal wellbeing gains evidence. The concept of natural capital has been posed in several ways, though always aligned with the notion and use of the capital concept in economic theory. The essence of the concept of capital is that it is a stock that possesses the capacity of giving rise to flows of goods and/or services. Economists use the concept of natural capital to explain the contribution of ecosystems (functional units with biotic and abiotic interacting components) to economic output and society wellbeing, which means that natural capital is seen as a production mean (input in economic systems but also able to absorb waste and by-products of economic activities). Different schools of economic thought have a number of different ways to approach the topic and, as consequence, different views on sustainable development requirements. The dispute between weak and strong sustainability is at the core of the discussion, with the former accepting capitals substitutability – namely manufactured and natural capital, and the later advocating that natural capital is limited and can not be replaced by others forms of capital. In conceptualizing natural capital, the ecosystems are the assets that generate a flow of benefits which are valued by society and to which we refer as ecosystem services. Recently ecosystem services have been aggregated around three main categories provisioning services (e.g. biomass, water, fiber); regulating and maintenance services (e.g. soil formation, pest and disease control); and cultural services (e.g. the physical, intellectual, spiritual and symbolic interactions with ecosystems, landscapes and seascapes).

The conception of the economic system, as an open system embedded and largely dependent and impacting on natural capital, is gaining prominence and rising particular concerns and calls for actions both at individual (firms) and collective (governments) levels. Some argue, namely the defenders of natural capital approaches to sustainable development, that the increasing depletion on natural capital and the resulting under-provision of ecosystem services and loss of society wellbeing comes from what has been called market failure, and hence argue that assigning economic values to ecosystem services can sustain the levels of ecosystem degradation and increase shareholder value and society wellbeing. Different approaches to overcome market failure can take place ranging from voluntary (private) approaches such as adoption of certifications schemes to governmental intervention. The type of approach depends, among others, on the degree of market failure and type of goods (private, composite or public). Below we illustrate the source of market failure, taking the case of public goods provision and externalities.

Natural Capital at the core of socio-economic systems (Adapted from EEA 2015)

Ecosystem services under-provision and responses to overcome market failure

Many ecosystem services do exhibit public good characteristics and are often jointly produced with market goods and, in this sense, can be considered externalities. We might consider the case of jointly provision of timber and non-marketed benefits by forests to highlight the case of positive externalities and public good provision from an economic activity. Wood and fiber are forest outputs that are valued by markets and hence, even in the presence of social demand for jointly produced non-market benefits (e.g., wildlife habitats, air pollution control, downstream flooding avoidance, etc), in the absence of any incentives or reward mechanisms the forest owners will manage their land to maximize wood and fibber production as they seek profit maximization and rely on existing markets to pursue this goal. This often generates under-provision of public goods even when they are valued and demanded by society, and hence there is loss of societal welfare.

Under perfect market conditions, an efficient allocation of resources will be achieved by the forces of supply and demand, through the price mechanism, e.g., prices acting as a signal to both consumers and producers in resource allocation. Indeed, in market economies, prices decide what and how much to produce, how to produce and for whom to produce. In certain circumstances, as it is the case of public goods, prices fail as coordinating mechanisms and resources allocation diverges from the social optimum (market failure). Public goods are characterized by non-excludability and non-rivalry in consumption, the former highlighting the difficulty in excluding someone from using it once the good is produced and the later feature denoting that use by one individual does not reduce, in principle, its availability to others. In many economic textbooks, national defense and street lighting are used to illustrated public goods and the two properties they possess. Some argue that non-excludability poses the main challenge to producing public goods privately (within the marketplace) as its is prohibitive to exclude non-payers from enjoying it meaning that producers has no-incentive to keep producing it or produce it at social desirable levels. By being impossible to exclude someone from enjoying a public good that is costly to produce people if asked to voluntary pay for it will be tempted to free ride on the efforts of others – free ride problem. READ MARTA ET AL 2014. Different mechanisms can be adopted to solve market failure, ranging from private and voluntary initiatives (for instance in cases where products feature both private and public goods characteristics certification can play) to pure governmental intervention. The certification or information labeling of products might also be a way to communicate environmental and other attributes that are not directly visible in the products, with the goal of promoting sustainable management. The rationale behind certification mechanisms is simple: if there is a market demand for differentiated products, meaning that consumers are willing to pay for the price difference listed by producers due to their compliance with environmental standards and the consequent delivery of external benefits, then a market-based solution for sustainable rural development becomes possible. Governments intervention to solve market failure can be diverse, typical through direct regulation (command and control policies - e.g., zoning land use or imposing emissions standards or legal limits) and market based instruments (e.g., taxes, subsidies, payments).