Preserving Natural Capital in a World of Uncertainty and Scarce Financial Resources

Abstract

Natural capital should be preserved because it exhibits features that distinguish it from all other kinds of capital. Natural capital provides fundamental life-support functions, is a necessary input into production and is often unique in that its destruction is irreversible. The notorious prevalence of risk, uncertainty and ignorance makes it difficult, however, to state which parts of natural capital should be preserved. Some forms of natural capital are more likely to be substitutable than others. A good case can be made for preventing large-scale biodiversity loss, protecting the ozone layer, restricting emissions that cause global warming, limiting the accumulation of toxic pollutants and for restricting over-harvesting and soil erosion.

Another difficult question is how, to what extent and for how large costs certain forms of natural capital should be preserved. Both the 'precautionary principle' and the concept of 'safe minimum standards' are rather elusive, especially on the question of costs. Policy measures are discussed that allegedly preserve natural capital at low, or even negative, costs: the abolishment of environmentally and economically harmful subsidies, the substitution of market-based for command-and-control instruments, the substitution of ecotaxes for labor and capital income taxes and the so-called 'Porter'-hypothesis that tighter environmental regulation will increase firms' productivity. It is argued, however, that while there is some scope for policies that are good for the environment and for economic development at the same time, the relationship between the environment and the economy is likely to remain one of a fundamental trade-off. Resolving this trade-off is beyond scientific reach and should be left to democratic decision making. What science can do, is to help basing democratic decisions on rational grounds.

JEL Classification: Q20, Q30, Q40