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UW’s Barbier: Natural Capital Depreciation Necessary in Measuring Economic Wealth

November 17, 2014

Economic indicators that omit the depletion and degradation of natural resources and ecosystems are misleading, according to a commentary by University of Wyoming economist Edward Barbier that appeared in the Nov. 6 edition of the international journal Nature.

In his article, “Account for Depreciation of Natural Capital,” Barbier says conventional measures that track the accumulation of a country’s national wealth routinely account for the depreciation, or “wearing out,” of human-manufactured capital, such as buildings, equipment and tools, that are “used up” as an economy produces more goods and services each year.

But these conventional measures do not allow for the depletion and degradation of “natural capital,” such as energy resources, minerals and forests that also are “used up” through our economy’s annual production, says Barbier, the John S. Bugas Professor of Economics and Finance in the UW College of Business.

After examining this natural capital depreciation for rich and developing countries since 1970, Barbier observes several trends:

-- Except during the Great Recession years, natural capital depreciation has been on the rise in all countries since the 1990s.

-- Since 1970, the decline in natural capital has been five times greater in developing countries compared to the eight richest economies.

Additionally, he says, since 1950, the world also has seen dramatic declines in “ecological capital” -- ecosystems such as wetlands, coral reefs, grasslands and freshwater systems that also provide valuable goods and services to economies.

Using the example of mangrove loss in Thailand, Barbier shows that the “hidden” economic costs of declining ecological capital can be substantial. For example, losing one-third of its mangroves to deforestation since 1970 has cost Thailand more than $2.73 billion in U.S. dollars -- a sum that has never appeared in national accounts.

“To obtain a more accurate measure of how much an economy accumulates wealth requires better accounting of the depreciation in natural capital, including loss of ecosystems,” Barbier says.

Widely published in natural resource and development economics as well as the interface between economics and ecology, Barbier has served as a consultant and policy analyst for a variety of national, international and non-governmental agencies, including many United Nations organizations and the World Bank. He has written more than 200 peer-reviewed journal articles and book chapters, written or edited 21 books, and published in popular journals.

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