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Organizations Involved: Institute for Policy Integrity
Source: Institute for Policy Integrity

Abstract

National accounts—which measure a country’s aggregate economic activity, including Gross Domestic Product (GDP)—largely ignore natural capital and ecosystem services. This omission occurs because national accounts heavily rely on market transactions to identify and value economic activity, whereas ecosystems’ contributions occur most commonly outside markets. This leads governments, businesses, and decisionmakers to ignore or misidentify some sources and uses of their income and wealth, skewing their decisionmaking.

Recognizing these shortcomings, many countries, including the United States, are increasingly moving towards Natural Capital Accounting (NCA), a system of measuring natural capital and ecosystem services in a way that allows for their integration with national accounts.

NCA will better represent connections between economic activity and nature in national accounts. Countries’ and businesses’ balance sheets will be more accurate, better reflecting nature’s uses and value and ultimately leading to better decisionmaking. NCA also supports the construction of alternatives to GDP that economists have long been advocating for, such as Net Domestic Product (NDP), as they better represent changes in well-being and sustainability.

In this report, Policy Integrity provides an overview of NCA for non-economists. Policy Integrity primarily focuses on the United States’ effort to integrate natural capital into national accounts, though Policy Integrity places it in the greater context of similar global efforts and the UN’s SEEA. In doing so, Policy Integrity discusses some of the factors that motivate this endeavor, describes the conceptual underpinnings of NCA, highlights some of its potential uses, and documents current efforts to develop natural capital accounts. In the concluding section, Policy Integrity discusses challenges to their implementation as well as areas for future research.

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