3.1.1  Not a new idea

The idea that natural capital is an economic capital can be traced back to Smith’s (1952) Wealth of a Nation in 1776. In this first economics book, he made a comparison of natural capital of a farm to man-made capital in his statement, “An improved farm may very justly be regarded in the same light as those useful machines which facilitate and abridge labor. An improved farm is equally advantageous and more durable than any of those machines, frequently requiring no other repairs than the most profitable application of the farmer’s capital employed in circulation.” Regarding the productivity of farming, Smith (1952, p. 157) states that after all their labor, a great part of work always remains to be done by her [nature]. Classical nineteenth century economists such as Ricardo and Faustmann also incorporated the concept of natural resources as capital in economic theory (Fenichel and Abbott, 2014).

In the 1980s Longva was commissioned by Norway’s Central Bureau of Statistics to create an economic classification of natural resources. The nonrenewable mineral and energy resources were classified as finite commodities. The renewable biological resources such as fish, forests, and agricultural products were classified as conditionally renewable commodities. As a conditionally renewable resource, their production is dependent on the condition of the natural capital such as the fertility of soil, quality of water, number of reproductive fish stocks, and quality of air.

A third classification was renewable, inflowing resources, associated with the sun and its interaction with the earth’s surface and atmosphere. These resources are not traded as commodities and are infinite in supply.

A fourth classification was the environmental resources of air, water, soil, and space. As a rule, environmental resources are not consumed when used in the production process, but as the quality of the resource varies it alters production capacity (Longva, 1981). These are conditionally renewable resources, whose productivity and usefulness, and so their economic values, are dependent on the integrity of the resource.

Repetto (1988) makes a similar, albeit more modern analogy, by stating that as man-made assets (buildings and equipment) age, they become less productive and their worth decreases. To maintain their original or optimum capacity, money is set aside for their replacement in order that the income flowing from their use is sustainable. But the value of natural assets also falls if the assets are depleted. Thus, in the same sense that a machine depreciates, soils depreciate as their fertility is diminished, since they can only produce at higher costs or lower yields. Repetto states natural resource depreciation needs to be treated as asset depreciation in order to put man-made capital and natural capital on the same footing.

Since Longva’s (1981) economic classification of natural resources, the field of ecological economics has grown along with the desire to account for and value the processes and functions of natural capital.

3.1.2  The landscape as a living factory floor

The agriculture landscape has inherent structures, processes, and functions specific to its geography and geology. These inherent attributes are affected by how it is managed. This is analogous to physical or built capital, such as factories. Factories have an inherent structure that supports the processes and functions specific to their design objectives. The outputs and conditions of natural or physical capital are conditionally renewable that are affected by management, which is in turn influenced by how it is accounted for and valued.

3.2.1  Biomes

Biomes, or “major life zones,” are large geographic region of the earth’s surface with distinctive plant and animal communities. There are both terrestrial, or land-based biomes, and aquatic biomes. A biome may be spread over a wide geographic area, or as a grouping of many ecosystems that share similar environmental features and plant and animal communities (Caris et al., 1996). Biomes represent a superficial and somewhat arbitrary classification of ecosystems. These are not distinct geographical features such as a mountain range and, therefore, biologists are not unanimous in how they classify biomes or in the number of biomes. Commonly recognized biomes include the following:

Land-based biomes

Tundra (permafrost regions)

Taiga (high-latitude forested regions)

Temperate deciduous forest

Grasslands

Deserts

Tropical rainforests

Water-based biomes

Marine

Estuary

Fresh water

Using the factory analogy, the biomes are not the production facilities, but define the regional economy (ecology) and the resources available that support the ecosystems.

3.2.2  Ecosystems

Ecosystems act as the factory unit. They consist of abiotic (nonliving) and biotic (living) components. Abiotic components are sunlight, temperature, precipitation, water, and soil parent material. Biotic components consist of plants, herbivores, carnivores, omnivores, and detritivores (generally those smaller organisms that consume decaying plants). As noted, the entire biosphere of Earth is an ecosystem since all these elements interact. But for analysis and assessment, it is important to adapt a pragmatic view of ecosystem boundaries.

The Millennium Ecosystem Assessment (MEA) developed 10 reporting categories to provide a useful framework for understanding ecosystems relative to human well-being (Alcamo and Bennett, 2003):

1. Cultivated: lands dominated by domestic plant species, used for and substantially changed by crop, agroforestry, or aquaculture production
2. Dryland: land where plant production is limited by water availability and the dominant uses are large herbivores, including livestock grazing and cultivation
3. Forest: lands dominated by trees that are often used for timber, fuel wood, and non-timber forest products
4. Marine: ocean with fishing typically a major driver of change
5. Coastal: the interface between ocean and land extending into the land to include all areas strongly influenced by proximity to the ocean
6. Inland water: permanent water bodies inland from the coastal zone, and areas whose ecology and use are dominated by the permanent or seasonal occurrence of flooded conditions
7. Island: lands isolated by water with a high proportion of coast to inland
8. Mountain: steep and high lands
9. Polar: high-latitude systems frozen for most of the year
10. Urban: built environments with a high human density

Defining the boundaries or identifying categories of ecosystems is not an exact science as those definitions are influenced by what the intentions of the delineation are. The MEA categories do not have definite boundaries and often overlap. The MEA uses overlapping categories because this better reflects real-world biological, geophysical, social, and economic interactions, particularly at these relatively large scales.

3.3.1  Categorize goods and services as same

The predominant definition today is to refer to both ecosystem goods and ecosystem services as ecosystem services. This framework to categorize all ecosystem outputs and outcomes as ecosystem services was adopted by the 2003 Millennium Ecosystem Assessment (Alcamo and Bennett, 2003). This strategy is still widely applied, although it is not considered a universally accepted method (Haines-Young and Potschin, 2009). Costanza et al. (1997) used this framework in determining the value of the world’s ecosystem services and in an updated 2014 article addressing the changes in the global value of ecosystem services (Costanza et al., 2014). The papers identified 17 types of ecosystem services, which included both outputs, such as crop production, and outcomes, such as water purification.

The MEA (Alcamo and Bennett, 2003) categorized these ecosystem services as

1. Provisional ecosystem services are the consumable products obtained from ecosystems and include food, fiber, fuel, genetics, biochemicals, and fresh water. Provisional services have the characteristic of being a tangible good that is relatively easy measured, valued, and exchanged.
2. Regulating ecosystem services are benefits that are derived from the processes and functions of ecosystems such as water flows, erosion control, water purification, pollination, and biological controls of insects and disease. Regulating services have the characteristic of traditional services that are difficult to measure, value, and exchange.
3. Supporting ecosystem services are those that are necessary for the production of all other ecosystem services, and their impacts on people are either indirect or occur over a long period of time. These include soil formation, primary production, nutrient cycling, oxygen production, seed dispersal, water cycling, and sufficient biodiversity for evolutionary processes.
4. Cultural ecosystem services are nonmaterial benefits that include ecological and cultural connections that create diverse cultures, religious values, knowledge bases, inspiration, aesthetic values, social relationships, sense of place, heritage, and recreation. Perceptions of cultural services are more apt to differ among individuals and communities than how to value provisional services and regulating services.

3.3.2  Categorize goods and services as different

A less prominent definition is based on the traditional economic terms associated with goods and services. Brown et al. (2007) made the distinction that ecosystem goods are fundamentally tangible, material, and consumable products such as food, grain, timber, and water generated by the landscape. Like economic goods they are the physical outputs of a process that are produced without interaction with the customers. Goods can be produced to specifications, are relatively stable over time, and their value is associated with the product or unit itself.

Ecosystem services are the less tangible, nonmaterial, and nonconsumable processes such as purifying water, sequestering carbon, and pollination of crops. These ecosystem services occur within and on the landscape and support the production of goods. Like economic services they are intangible processes that cannot be weighed or measured directly and usually require a degree of interaction to have value. Services may vary day-to-day depending on conditions, they can’t be stored, and their value is often associated with a location, a good, a person, or site conditions.

She (1997) recognized outputs and outcomes as distinct ecosystem goods and services. She defined ecosystem services as the processes through which natural ecosystems, and the species that make them up, sustain and fulfill human life, as well as support the production of ecosystem goods, such as forage, timber, biomass fuels, natural fiber, and food.

3.3.3  Identify ecosystem services as service providing units

Service providing units (SPUs) uses a geographically based definition and identifies values directly associated with the landscape. SPUs have emerged to ensure that the methods to account for ecosystem services link to and support social and economic values. The SPU suggests that instead of just defining a population or organisms along geographic, demographic, or genetic lines, it can also be specified in terms of the services or benefits it generates at a particular scale (Luck et al., 2009). The use of the word “unit” is an attempt to focus attention on the need to spatially quantify the ecosystem service as it relates to an economic value.

The SPU concept is explained with the example of a population of honeybees. At a given density, the bees may provide all the pollination requirements of an almond grower whose production can be quantified to define the SPU in economic terms. Once an SPU has been defined, attention can be given to how changes in this SPU might affect service production and some measure of value. The definition of an ecological unit is a crucial step to facilitating meaningful economic valuation (Kontogianni et al., 2010) and could support payment programs for specific ecosystem services (Sanchirico and Siikamaki, 2007).

Kontogianni et al. (2010) state advances by ecologists in spatially defining the delivery of ecosystem services can provide a framework for quantifying complex ecosystem processes and resulting services.

3.3.4  Ecosystem services as FEGS and BRIs

The fourth definition described is based on the desire to connect ecosystem good and service value directly to economic indices. A group of scientists at the United States Environmental Protection Agency (USEPA) Office of Research and Development has adopted the concept of Final Ecosystem Goods and Service (FEGS) as a foundation for defining, classifying, and measuring ecosystem services (Landers and Nahlik, 2013) based on ecological endpoints.

Ecological endpoints are defined as the “components of nature, directly enjoyed, consumed, or used to yield human well-being” (Boyd and Banzhaf,

2007) . As such, ecological endpoints or final goods are what is counted in GDP: the total value of goods that are consumed. The FEGS system excludes intermediate processes, such as ecosystem services and goods that are used to produce final goods. Using ecological endpoints creates a distinction between environmental features that are directly and indirectly valuable to society. The notion of direct versus indirect goods and services is conventional in the economics of traditional markets (Boyd and Banzhaf, 2007).

As a scenario, Boyd and Banzhaf (2007) state forests that sequester carbon and thus contribute to the reduction of climate-related damages would not be accounted for in the FEGS. They state forests may be a final ecosystem service for other reasons but not for climate-related reasons. In this framework, climate-related damages to natural resources are accounted for due to the effect of climate-related sea-level rise on beach recreation. If sea-level rise damages beaches, and thus recreational benefits, that will be captured in our beach-related ecosystem service measures (e.g., beaches themselves). The fact that forests sequester carbon is certainly important but only in an intermediate sense.

They note that from an economic accounting perspective it does not require the measurement of “all that is ecologically important.” Rather, one can economize on measurement by monitoring only the end products of complex ecological processes. It is for this reason that FEGS does not include ecological processes or functions. Relying solely on FEGS would not allow measurement of carbon sequestration and the social cost of carbon as an approach (Olander et al., 2015).

For this reason, beneficial resource indicators (BRIs) are proposed to account for less tangible nonuse values that can be difficult to quantify and are often excluded. BRIs are measurable indicators that capture this connection by considering whether there is demand for the service, how much it is used (for use values) or enjoyed (for nonuse values), and whether the particular site provides the access necessary for people to benefit from the service, among other considerations (Olander et al., 2015). BRIs are needed, because while carbon sequestration does not meet the definition of FEGS, it is categorized as a BRI because the research has been done to link carbon sequestration to benefits through the social cost of carbon and the climate.

Hence, from a conceptual perspective, all FEGS are BRIs, but not all BRIs are FEGS.