By Brian DePratto, Economist, TD Bank Group

Forests have traditionally been viewed as a resource to be used for timber and fiber, beautiful natural spaces to be enjoyed, and, where ecologically significant forest areas exist, protected. But there is a new way to view forests from an economic standpoint: as a significant source of natural capital. Natural capital is a way of putting the benefits that nature provides for free into a framework that can be used for financial decision-making, which paves the way for conservation to be considered as an economically beneficial activity.

Natural capital makes a business case for conservation

Natural capital is a relatively new economic concept that was introduced in the 1970s. It is starting to gain some ground with the business sector. Carbon pricing is being legislated into practice in many countries around the world, and more businesses are taking into account their environmental impacts. Natural capital assigns a financial value to the multiple benefits natural resources such as forests provide, giving a value to natural resource benefits that can inform economic decision-making. Assigning this value is important, as there are real short and long-term economic benefits to preserving natural capital assets.

My own work on natural capital was “naturally” informed by a love of the outdoors, which started on numerous family camping trips when I was a kid, including a yearly visit to Killarney Provincial Park on Georgian Bay in Ontario.

Economics became my focus later in life, and my interest in the environment happily coincided with the work I was asked to do at TD on natural capital. In the past few years, I’ve co-authored three reports on the subject, most recently with Dan Kraus of Nature Conservancy Canada (NCC): “The Natural Capital Value of Forest Habitat Conservation”.

TD helped to pilot the Natural Capital Protocol, which was formally adopted by the member organizations of the Natural Capital Coalition around the world in July of 2016. The protocol is a guideline for the calculation and valuation of natural capital impacts.


Valuing the natural capital of forests

In economics, you can only use variables that you can assign specific values to. These variables (in other words, the economic attributes provided by forests) are:

  • Carbon storage and sequestration
  • Soil formation
  • Water purification
  • Air quality
  • Storm water control
  • Shade and cooling
  • Recreation
  • Fibre
  • Timber
  • Wildlife habitat

It’s important to point out that these aren’t the only potential economic variables of natural capital – these are just the slice of the pie that can be easily valuated. Factors such as cultural significance and biodiversity could be included, but we don’t yet have the proper tools to value them.

Keeping this in mind, a natural capital valuation would be higher if we could measure these remaining variables properly from an economic standpoint.


Valuing the Natural Capital of Urban Forests

The natural capital of urban forests may be measured in terms of improvement in air quality, shade provided by trees (which results in energy savings), carbon sequestration and flooding control through root systems and absorption (wet-weather flow). As examples, we’ll look at Greater Vancouver and Montreal.

1. Greater Vancouver’s Forests

Natural Capital value: $224.15 million per year

Annual Benefits from Urban Forests in Greater Vancouver**

Benefit $ value (millions) $/tree
Wet-weather flow 96.43 $1.34
Air quality $115.86 $1.61
Energy savings $4.64 $0.16
Carbon sequestration $7.21 $0.10
Total benefit $224.15 $3.21
Cost-benefit ratio* - $4.59

The forests surrounding Greater Vancouver provide the largest total natural capital of any forest in Canada, particularly in the areas of flood control and air quality.

 

2. Montreal's urban forests

Natural Capital value: $24.44 million per year

Annual Benefits from Urban Forests in Montreal**

Benefit $ value (millions) $/tree
Wet-weather flow $15.95 $2.66
Air quality $6.19 $1.03
Energy savings $1.72 $0.29
Carbon sequestration $0.58 $0.10
Total benefit $24.44 $4.07
Cost-benefit ratio* - $1.88
Image Credit: John Lian, Wikimedia Commons

Image Credit: John Lian, Wikimedia Commons

Forests in Montreal have high natural capital values in the same areas as Vancouver – air quality control and flood protection. The wet-weather flow numbers are especially important in Montreal, as they reduce the flood load on Montreal’s infrastructure.

* A cost-benefit ratio is used in cost-benefit analysis to determine the value of a project for the money. It is calculated by dividing total discounted benefits by total discounted costs.

** Source: The Value of Urban Forests in Cities Across Canada


Valuing the Natural Capital of Forest Habitat Conservation

For our natural capital valuation of NCC forest properties, we used a slightly different method to arrive at the natural capital value. Annual carbon storage, stored carbon, flood control, water treatment and non-carbon atmospheric pollutants were all measured.

Midgely, British Columbia

Natural capital valuation: $3.16 million per year

Annual Natural Capital Service Values of Midgely, BC property

Service Type Dollar Value
Non-carbon atmospheric pollutants $63,754
Atmospheric pollutants stored carbon1 $3,046,812
Annual carbon storage $45,665
Flood control $1,685
Water treatment: Phosphorus $2,027
Water treatment: Nitrogen $2,458
Total: $3,162,401

1 : This represents the accumulated value of the carbon estimated to be stored within each property. The continued existence of ecosystems within the property prevents this carbon from entering the atmosphere.

Image Credit: Steve Ogle

Image Credit: Steve Ogle

Image Credit: Steve Ogle

Image Credit: Steve Ogle

The Midgely, BC property is located in the Columbia forest region. Carbon sequestration and storage are responsible for most of the natural capital value of these areas, while scrubbing atmospheric pollution provides the second-highest value.


Conserving natural capital with NCC

When forests are protected, we are able to ensure the natural capital they provide continues for future generations – much like a perpetuity, which is a financial instrument, provides a stream of income while preserving financial capital. Forests, if strategically conserved and properly managed, will continue to provide capital benefits indefinitely.
 
The Nature Conservancy of Canada’s work with forests is helping conserve Canada’s natural capital, and TD’s support of NCC has helped ensure that this work can be done. For TD, it’s about recognizing that forests are key to very important things like mitigating climate change, which have tangible economic benefits.  
 
Canada is home to the third-largest forested area in the world. Forests are one of our greatest natural resources, and ecologically significant forested areas should be protected and preserved for future generations. NCC’s forest conservation efforts are helping ensure that this resource will be around for the next generation of Canadians, and natural capital is one of the tools that can be used in tandem with science to show how important this work is to key decision-makers.

By Brian DePratto, Economist, TD Bank Group


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