Every businesses quantifies its assets. This sustainability expert calculates the value of nature

Lots of people value nature in different ways and for different reasons — maybe it’s a walk in the woods, or a day at the beach, or a view of the mountains. But putting an actual value on nature, like a business does with one of its assets, can be tougher to do.

Josh Abbott, though, has been thinking about this, and how to actually put a value on our natural resources.

Abbott is a director and professor in the School of Sustainability at Arizona State University. And when he visited KJZZ’s studios, The Show asked if he could describe what he’s doing to people who are not economists.

Full conversation

JOSH ABBOTT: Yeah, so Mark, the general idea is that we think of nature as a form of capital. And capital’s something I think most people have some idea of. You know, a company has assets, it has buildings, it has machines, all those sort of things, and all of those things produce benefits over time. And those kinds of capital are often really easy to know what their value is because you can go out and buy a machine.

MARK BRODIE: Yeah.

JOSH ABBOTT: But when it comes to nature, it’s often the case that there’s not really a market out there for clean water or fish in the ocean. And so we have to kind of look for ways to value that and bring forward those values that are actually there. They’re contributing to our well-being, they’re contributing to our economy, but they’re just not out there in an asset market for us to find.

MARK BRODIE: So it’s the same concept as looking at any business and saying, “OK, you have” — as you say — “these buildings, these computers, these machines, this whatever, and it’s worth this amount.” So it’s the same concept with nature, but it sounds like you have to go about it in a different way because you can’t just look up how much a widget costs or whatever. Like, you have to sort of calculate that somehow, right?

JOSH ABBOTT: Yeah. And so, you know, there’s a lot of different kind of tricky ways we have to go about this. Some are more transparent than others. But the general idea is that nature’s providing us what we would call ecosystem services. There’s these flows of values that are coming sort of every day to us.

And the way that you think about the value of investing in a little bit more natural capital is, OK, well, if we were to have one more thousand gallons of water in an aquifer, or a few more tons of fish in the ocean, just as a couple of examples, what would be the benefits flows that we would get now and all the way into the future? And then we have to do what markets do: We discount the future compared to the present, put all that together, and that’s the kind of calculation. So in the end, it looks very much like a standard financial calculation, but there’s a lot of details in terms of how you get there.

MARK BRODIE: I would think so. I mean, do some of the criteria that would apply to business apply here as well — things like supply and demand, things like how people feel about these things, things about whether or not another business might need something that one business has, like a trade secret or something? Like do those kinds of variables apply when you’re talking about nature also?

JOSH ABBOTT: Yeah, certainly the laws of supply and demand matter. One of the critical things is the quantity of natural capital that is out there. If it’s very scarce — then, you know, if we have a really heavily depleted aquifer, for example — then the value of investing more in that aquifer may be very high. Whereas if we have sort of a brand new, untapped aquifer, maybe the value’s not as high in that context. So scarcity, as in so many different areas of economics, always matters.

And then another kind of really important dimension is it really matters how resources are managed. So maybe a way to think about this is you could have two identical-looking companies, one of which is under really amazing management. So think about Apple under Steve Jobs or something, versus that same company, same people, same stuff, but with someone less visionary, less capable of a leader. Those two companies would have a different valuation on Wall Street, right?

Same sort of idea applies with our natural capital. How well are we managing the resource? Are we overfishing our fisheries? Are we utilizing them in ways that deplete their value? Are we devoting our groundwater to high-value activities, or are we using it in ways that sort of squander the wealth it could create? So that’s another important dimension.

MARK BRODIE: How well do we know what supplies exist? Like how much do we know how much water is underground, or how many trees are in the Amazon, or how many fish are in the ocean?

JOSH ABBOTT: Yeah, it won’t surprise you that it really depends on where you are and particularly which natural asset you’re talking about, right? We know far less in many ways about our natural capital than we know about our physical capital.

What I would say, though, is that the sort of proliferation of technology really in the last 10-15 years has really enhanced our ability to know things. And so the state of trees, state of forests all around the world, including in places where you maybe don’t have a lot of money or resources to spend on monitoring those resources, we can use satellite data to really understand tree cover. And so there’s unprecedented levels of knowledge about things that we can observe from satellites.

MARK BRODIE: We know a lot more now, it seems like, than we did maybe 10 or 20 years ago.

JOSH ABBOTT: Yeah, we’re learning more and more about the physical quantities of natural capital that are there. Obviously, that’s a moving target because in many cases we’re also heavily depleting them even as we are learning about them.

We’re also increasingly learning a little bit more about the values that they create, the services, the benefits that they give us, and starting to be able to attribute values to that. The value is probably the part that’s the slowest to develop.

MARK BRODIE: Well, I would imagine that it must be somewhat up for debate, right? People value, I guess to an extent, people value business assets maybe a little bit differently from person to person or accountant to accountant. But is there variability? Like if you try to put a value on the number of fish in the sea, for example, might that be vastly different than a colleague who’s looking at everything else the same?

JOSH ABBOTT: Yeah, there are certainly going to be some differences that arise because of differences of information. There may also be really different values that arise because we may be looking at very different fish stocks in very different places.

And you really can’t, when it comes to nature, you can’t sort of add up all the groundwater or all the fish and say these are all the same, because we can’t — unlike say oil, where there’s a commodity market and the price of oil is pretty consistent from one place to the next — you don’t have that sort of ability to have an interconnected capital market in the way that we do for a marketed asset like say oil, right? So there is that aspect.

There’s also a lot of just different kinds of values that people place. Some values are going to be directly attributable and find their way into marketed goods and services. So just as a quick example, the use of surface water in urban lakes in Phoenix, for example. That’s a case where we can actually show that these lake communities that draw on different kinds of water sources but have lakes that provide value. We can show how those lakes, the proximity to those lakes actually improves property prices. So regardless of exactly why people value it, we can see that there is a market footprint of that water in the prices of the houses, and then we can sum all that up and get an idea of what that value is. And it’s actually surprisingly high.

MARK BRODIE: That’s interesting. ... Once you come up with the calculations, how do you use them? What is the benefit of knowing the value of groundwater or trees or really anything in nature?

JOSH ABBOTT: Yeah, so I think there are different contexts. At the end of the day, we want numbers because we want to make better decisions, right? And so sometimes the number could be utilized in a decision about should you develop a natural resource or not. So should we cut down a stand of forest in order to create housing or something, right?

And so if we know what the value of that intact forest is, we’re able to then compare that to the value that would be created by disinvesting in it. And that gives us a better sense of not just the value we gain by having the housing — which the policy and markets are really good at telling us that, and there’s plenty of advocacy for that — but what is the sort of hidden value that we’re losing?

And so bringing that to bear can be really important for particularly people in government that are thinking about the management of resources. It can be really important for — again, the fisheries example. If we know what the value of a fish in the water is, we can compare that to the value created by harvesting it. And if the latter is smaller than the former, then that’s a really strong sign that maybe we need to invest more in our fisheries and harvest them a little less intensively. So those are a couple of examples.

One more I might give you really quickly is that if we do this over a large number of different forms of natural capital, we can actually start to create at some sort of a scale — whether it’s municipal, state or federal — we can actually start to create a balance sheet of nature. And those assets are assets just like all the other forms of capital we have as a society.

Like our education. When we educate people, we’re investing in human capital. When we have machines, we have physical capital. If we have a natural capital account — balance sheet, if you will — we can actually say something about what, from one generation to the next, to what extent are we investing in that or are we running it down?

MARK BRODIE: When you talk about value, I can imagine it being, I don’t want to say controversial, but maybe not universally agreed upon. Like the example you gave of the value of the trees in the stand of forest versus the value of harvesting them and building homes, because if I’m a home builder, the stand of trees there is of no value to me whatsoever. If I’m the nearby community, those trees might have great value, and vice versa with cutting down the trees. So I would imagine that you have to sort of balance who’s getting the value, right? Like who you’re looking at is deriving value from either investing in the natural resource or not.

JOSH ABBOTT: Absolutely, Mark. So one of the things we always have to confront when we’re thinking about these tradeoffs that we face is that the benefits and costs don’t all go to the same people, right? And so in many cases, when we have development, there can be some concentrated benefits that occur to corporations, and there can also be some broader benefits to the community from employment, etc.

But then there may be a different scale over which those costs of degrading the environment are felt. And they may be felt somewhat locally. If you knock down a bunch of trees in an area, you may find that temperatures are higher because there’s less evapotranspiration. You may find that air quality declines, and you may find that water retention and problems of erosion or siltation in local waterways may increase. Those may be felt in the same scale as some of the benefits.

But then there are some other benefits, like the carbon that is sequestered in those trees, and that benefit is occurring all over the world, right? That’s a benefit to the climate as a whole. And so when it comes to nature, we often have effects that are felt at all different kinds of scales, and that creates a real complexity when we’re valuing these assets, for sure.

MARK BRODIE: Do you imagine that by putting an economic and financial value on nature — and I’m guessing you don’t love that term — but sort of making it so that people see the financial benefits of nature, that it might get people to look at equations differently and think about conservation differently and maybe make different choices in their own lives?

JOSH ABBOTT: Yes, absolutely. I think it can have influence from individual decisions every day about what kind of food you eat, where you choose to live, all of those sort of things. If you have some — I’m not saying that ever suggesting that people are going to have hard numbers in the back of their head necessarily for the value of nature. But the more people understand the pathways, the ways that sometimes maybe “useless” — kind of air quoting there — seeming nature, like, “OK, well, I value it, but I can’t really see in ways in which it would actually ever figure in anything that would have a market value.”

But if people could actually better understand and have at the front of their mind the ways like the trees preserve soils, right? They reduce erosion, and that has knock-on consequences for the cost of providing water to municipalities. Those kind of things I want people to get.

MARK BRODIE: Can you give an example of sort of how you come up with the calculation for something in nature, of what its economic value might be?

JOSH ABBOTT: Yeah, so in a couple of examples that we’ve pursued, one of those was related to groundwater and to actually what we call fossil groundwater, groundwater that does not recharge really quickly. And we did this in western Kansas, which is an area that’s heavily dependent on groundwater for agricultural production.

And what we basically did is we got a lot of data on the decisions that farmers make. We looked at the ways that they utilize water in their farming. We got estimates of the value that that water creates for crop production, a lot of that corn and soy agriculture. And we then also looked at how those land use decisions feed back and reduce the groundwater table, And in the way to think about that groundwater depletion is that is basically depreciation, right?

And so we make those calculations, and then that gave us the value of an acre-foot of groundwater in western Kansas. And then we were actually able to show that Western Kansas was rapidly depleting this water wealth. And if you’re thinking from a regional economic development perspective, if you are depleting your asset base, you probably need to be thinking really carefully from a regional sustainability perspective about what other investments are you going to make so that this region is a viable concern for future generations.

I’ll give you one more quick example in a very different context. And this was done not by my team, but by a colleague from the University of Chicago that’s done some really cool work in India. And this is a case where there’s a clear linkage between the state of natural capital and human health. And when things start affecting human health, the dollar signs add up really quick.

And in this particular case, there were cattle, and these cattle in India were being treated by a pain-relieving drug. And this pain-relieving drug turned out to be toxic to vultures. And the use of this pain-relieving drug for cattle basically drove to functional extinction the vulture population in India.

And you might think, most people would look around and think vultures — kind of like mosquitoes — like who really cares about, who’s going to miss a vulture? Well, it turned out that that collapse of the vulture population increased the mortality rate of people in India by 4%.

MARK BRODIE: Wow.

JOSH ABBOTT: Because of diseases spread by all the decomposing carcasses of animals —

MARK BRODIE: That vultures otherwise would have eaten.

JOSH ABBOTT: That vultures otherwise would have eaten. So they provide sanitation services for free. We don’t even pay them. And they’re like the garbage men of nature, right? And because of that, this resulted in tens of billions of dollars of damage per year to the Indian economy. And so sometimes even seemingly insignificant or even kind of gross parts of nature have a value that, if we only work at it, we can find.

MARK BRODIE: Interesting. All right. That is Josh Abbott, a professor and director of the ASU School of Sustainability. Josh, thanks so much for the conversation. I appreciate it.

JOSH ABBOTT: My pleasure.

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