A thriving economy is an illusion if it comes at the expense of nature  – Inside track

It’s often said we’re a nation of nature lovers. So why is the UK’s environment in such bad shape? The stats are shocking. Nearly one in six Britain’s species are threatened with extinction, over two million hectares of UK soil is at risk of erosion and only seven per cent of native woodland is in good ecological condition. As far as nature is concerned, with friends like us, who needs enemies?  

The cause of all this depletion is that we’re not using the goods and services that nature offers at a sustainable rate. This is partly because the tools we use to measure economic progress miss much of what’s important.  

In 2021, the Dasgupta Review, which looked into the economics of biodiversity, was commissioned by the Treasury. Sir Partha Dasgupta unequivocally set out why economic progress has gone hand in hand with nature’s decline and laid out a powerful rationale for mainstreaming nature into our understanding of the economy. It was an intellectual tour de force but has been out of the spotlight since, although it has lost none of its relevance. How should the UK now bring this powerful analysis to life and turn it into action? 

GDP is misleading markets 

Let’s start by dissecting why we’ve been so blind to nature’s intrinsic value. At the root of the problem is the familiar metric of gross domestic product (GDP), which represents the value of all goods and services bought and sold each year. Economists and politicians are fixated on whether this number grows or shrinks. It is the global yardstick for a country’s standard of living and economic progress.  

And yet GDP gives us only a partial reflection of living standards as it ignores much of what we value most: leisure time, unpaid domestic labour, physical and mental health, as well as a healthy natural environment, to name a few. Through the narrow prism of GDP, destroying habitats, forests and soils to produce more consumable products increases our wealth, so the outcome looks positive, even though part of the nature we depend on has been permanently lost. It’s a fundamental flaw in the system that is gradually undermining our prospects. How can we get this so wrong? 

The crux for Dasgupta is that ‘value’ is currently measured by market prices. We can easily attach a price to what we think we have gained through our economic system, a new car or pair of shoes, for example. But it’s less easy to account for what we have lost as we can’t attach a market price to that. The natural world is difficult to quantify and value in economic terms because it can move around (think birds, fish, seeds) and many vital processes can’t be seen or heard (eg tree growth).  

This means that, when a good or service is bought or sold, its price excludes nature’s role in its creation, as nature is essentially free and, therefore, ripe for exploitation. 

Dasgupta dismisses the argument that continuing to grow GDP will lead to better technologies that will allow us to overcome the bounds of finite nature, because doing so will require further depletion of an already deteriorating supply of natural resources. In short, for economies to be able to thrive in future we will have to acknowledge and operate within the boundaries of our planet’s resources.  

The message is slowly sinking in 

Despite difficulty in measuring nature’s true economic value, the UK’s Office for National Statistics has made good progress in compiling a set of ‘natural capital’ accounts. These put the total asset value of nature at over £1.5 trillion, a number that is difficult to ignore. However, these aren’t yet being factored into Treasury or private sector decision making.  

The message is slowly sinking in. As one of the European Central Bank’s executive board members put it bluntly last summer, “destroy nature and you destroy the economy”. The UK has already begun to lead the charge by commissioning the Dasgupta Review and developing new techniques to measure natural capital accounts. But things aren’t moving nearly fast enough and nature continues to disappear. We now need to put these insights into practice.  

Markets should always reflect the value of nature they use
A good place to start is building markets that reflect nature’s value. Market activity already relies on nature. The Bank of England found that over 50 per cent of UK GDP and 72 per cent of UK lending depends on ecosystem services.

Investment into economic activities that protect rather than damage nature can deliver returns, boost productivity and help rural economies. For example, the benefits of peatland for carbon sequestration, recreation and cleaner air would deliver £4.60 back for every £1 invested, £2.80 would be returned in woodland benefits and £1.30 for salt marsh creation. But firms may not realise this because, for the reasons Dasgupta outlines, these benefits are not always communicated in market terms. To resolve this, the public sector could step in to carry out initial environmental improvements and demonstrate the potential for financial returns.  

At Green Alliance, we are working on turning the Dasgupta Review’s messages into concrete action, looking at how to create functioning markets in areas that improve nature and deliver returns for the private sector. 

One thing preventing governments from stepping in might be overly tight fiscal rules that discourage investment, particularly where the economic case, expressed in GDP terms, is unclear. We will soon publish proposals for how ‘green’ fiscal rules could remedy this. Similar work will follow on infrastructure, central banks and GDP.   

Professor Dasgupta produced a groundbreaking analysis, but its messages have not yet led to real change. We want to put the spotlight back on the review and relate its findings more clearly to the UK’s context. Unless we start to value nature properly and embed the need to preserve it into our economic system, we can’t enjoy real or sustainable prosperity.