Accounting for Natural Capital

I have been quiet over the last couple of winter months (Australian winter) on this blog. I have been traveling a bit, but have also been thinking and working on how to properly account for natural capital at a level of dis-aggregated production activities. Farming is a good example: the local farm level, or even field level, is where management of natural capital stock matters the most. Yet, there is currently no mechanism for accounting for natural capital at a farm level. There have been significant improvements in accounting for natural capital at the level of national economies through the implementation of the System of Environmental Economic Accounting. The Australian Bureau of Statistics has been one of the early adopters. While these efforts are to be praised, the level of aggregation at which they operate does not reflect the spatial scale at which humans make decisions about the management of natural capital. Like in farming.
For this reason devising ways of accounting for natural capital on farms has been of great interest. I spoke about our work (joint work with Samad Azad) in this area to several fora over the last few months: the OECD network on Agricultural TFP and the Environment, and seminars at the Australian Studies Centre at Universidad ORT Uruguay, Facultad de Agronomia Universidad de Buenos Aires, and the Institute of Environment, Energy and Sustainability at the Chinese University of Hong Kong.
A key point from our work is that evaluation of what is happening with natural capital on farms can be based on the observed changes in the contribution that natural capital is making to agricultural productive activity. The idea is to track the productivity of a farm over time and account for all inputs and other contributing factors that determine that productivity. After all factors are controlled for, the remaining variability of productivity over time can be related to the variability of natural capital. In this way, we can characterise the dynamics of natural capital on farms over time. Obviously, there are many complicating factors (like technology, adequate time frames, and the types of natural capital and their measurement), which we are considering in detail in the research. This is explained in the research outputs that are to follow. For the time being, we have just been excited to present the preliminary empirical findings from our work, which showcase the developed metric for soil natural capital at a field level that has been tested using actual field level data from commercial farms. The results show a variation in the dynamics of soil natural capital between fields and farms over several periods of time: while we find improved soil natural capital dynamics on some fields and farms, we find degradation in others, and not much change in the rest. These are some very promising results that give us confidence in the adequacy of the modelling approach that we are using.
Accounting for natural capital in agriculture is also a topic of one of the chapters (Ch. 7 by Carl Obst and Mark Eigenraam) in a book recently published by Edward Elgar that I co-edited. This book project was galvanised by the workshop on Environmentally Adjusted Productivity and Efficiency Measurement at the University of Sydney last year.
So, overall pretty busy couple of months. The winter is nearly over (complaining about Sydney winter, listen to me!), and the semester is in full swing. Hopefully, there will be more blog posts in the weeks and months to come!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.