Valuing Natural Capital’s Contribution to Economic Well-Being
Government budgets are allocated according to the strength of political and economic arguments. Economic arguments to support public policy and investment in natural capital and ecosystem services are often weak due to the complexities involved in valuing these life support systems, especially in the terms that Ministries of Finance and Economics are concerned with. For the last four years, the IDB has worked to correct this situation with the development of the Integrated Economic-Environmental Modeling (IEEM) Platform described in previous posts and several journal articles (i), (ii) and (iii).
The IEEM Platform’s value-added is its integration of rich environmental data organized under the System of Environmental-Economic Accounting, developed by the UN, EU, FAO, IMF, OECD and World Bank which enables assessment of economic impacts of public policy and investment in terms of gross domestic product and employment, but also on natural capital including forests, fisheries and water. The IEEM Platform generates indicators of intergenerational wealth that capture impacts on income, as well as stocks of natural capital and environmental quality which as indicated by the World Bank and the Stiglitz-Sen-Fitoussi Commission, are fundamental for measuring sustainable economic development. Assuring an equally or more prosperous future for the generations that follow is, after all, the foundation of sustainable development.
Linking the IEEM Platform with Ecosystem Services Values
We are excited by the advancements made in the last few years in improving integrated economic and environmental assessment methods and in quantifying natural capital’s contribution to economic well-being. Together, these new approaches shed light on the long-standing economic invisibility of natural capital. One key development has been linking the IEEM Platform with spatial ecosystem services modeling. This approach broadens the range of ecosystem services that can be considered in a consistent and robust economic analytical framework. A new application of the IEEM Platform linked with ecosystem services modeling is exploring the economic and ecosystem service impacts of strategies to achieve Sustainable Development Goal 15- Life on Land.
Reforestation and restoration of degraded areas have been chronically difficult to justify in economic terms using traditional methods of economic analysis. The linked IEEM and ecosystem services modeling Platform is powerful in that it quantitatively demonstrates the impacts of reforestation on not only marketed ecosystem services (e.g., timber, fuel and fiber) but also on non-market ecosystem services such as erosion mitigation, soil fertility and carbon sequestration. What is innovative in this approach is that values are not assigned to these services a priori. Instead, it is the interaction between ecosystem services and traditional economic sectors such as agriculture, energy, water and tourism, that effectively ascribe an economic value to these services.
The OPEN IEEM+ESM Platform
A tool such as the IEEM Platform is only good insofar as it is applied to real world decision making. For this reason, a collaboration is underway between the IDB and the ARIES Team (Artificial Intelligence for Ecosystem Services) to expand the user community of the IEEM Platform and ecosystem services modeling, and develop an online system that will eventually create access to IEEM and ecosystem services modeling tools customized for most countries in the Latin American and Caribbean region. Beginning with a pilot in Costa Rica and Uruguay, the purpose of OPEN IEEM is to reduce start-up costs, improve data reuse, and enhance robustness in the development and application of integrated economic-environmental and ecosystem service approaches for public policy and investment analysis. The OPEN IEEM Platform will make the data and models underpinning the system open and reusable. Through a user query, artificial intelligence will be applied to assemble the most suitable models and data for each country to respond to a broad range of public policy questions. Watch this space for developments of the OPEN IEEM Platform!