Natural Capital

Natural capital is the way economists refer to the natural environment, and in particular, aspects of nature that are of use to humans including minerals, biological yield potential, and pollution absorption capacity. The term is used to include the goods and services provided by the environment as components of the economic system.

According to the Organisation for Economic Co-operation and Development (OECD), natural capital consists of natural resource stocks, land, and ecosystems. In a city, natural capital that add to environmental amenity would include rivers, harbors and beaches, wild areas, sporting facilities, parks, community gardens, as well as the trees, flora, and fauna that live there. Urban natural capital helps improve the lives of residents, both mentally and physically, and can be instrumental in attracting tourism, a skilled workforce, and can help increase area property values.

The air, soil, and water supply are also part of urban natural capital that are often taken for granted until they become polluted. A related term is cultivated capital, which is natural capital that has been transformed or adapted by humans. Examples would include domesticated animals, plant varieties, and urban parks.

Traditionally, economists paid little attention to the natural environment, assuming it would always be there to provide its goods and services. However, as this notion was undermined during the 1970s and 1980s, the natural environment was included in economic models to the extent that it provides inputs to the economic system and takes back outputs—waste products from the economic system.

The notion of natural capital incorporates the idea that the natural environment should be treated in the same way as “human capital” (skills, knowledge, and technology) and “human-made capital” (buildings, machinery, etc.). Economists argue that this is necessary because the management of the environment should be seen as an economic problem of allocation of scarce resources.