Reflections on the Role of Natural Capital for Economic Activity

The discussion of the role of natural capital in economic activity is not new; increasing evidence of environmental pressures, climate deregulation and biodiversity loss have however increased the interest in the role of natural capital in the production process. This paper reviews approaches to conceptualising the contribution of natural capital to economic processes. It covers the neoclassical tradition of production functions with natural resources as well as damage functions, but also considers a more heterodox approach to reflecting the vulnerability of natural assets. Different ways of modelling natural capital lead to divergent conclusions about the sustainability of economic growth on a finite planet. By focusing on efforts to integrate nature’s contribution to economic production in economic modelling and standard economic metrics, this paper differs from ‘beyond GDP’ scoreboards that complement GDP with additional statistics. The applied part of the paper discusses selected approaches for quantifying the contribution of natural capital including production functions at different levels of aggregation, environmental-economic accounting and damage functions and highlights insights to be gained as well as difficulties. On this basis, we outline next steps for modelling natural capital in the production process.