The Importance of Natural Capital to Canada's Economy

Canadians enjoy immense wealth from our natural environment. We extract goods from the environment in the form of renewable and non-renewable resources (such as metal ores and timber), and benefit from the ecosystem services the environment provides (such as the filtering of air by trees and the absorption of flood waters by plains and wetlands).
This policy brief explores the concept of natural capital and the critical role of natural capital in Canada’s economy. It also considers the potential role for policy to focus on increasing the productivity of our natural capital. In doing so, it builds the case for inclusion of natural capital valuation in private and public decision-making.

Key Messages:

  • Like our labour force, machinery, financial resources and knowledge, our natural environment is an asset. Natural capital comprises nature’s assets that produce value -- and like all assets, we must understand, measure and manage our natural capital in order to use it optimally.
  • Traditional economic indicators and measures (such as gross domestic product, balance sheet accounting, and productivity indicators) have not fully measured natural capital. We are not measuring how much natural capital we have, at what rate we are using it, or how it is being devalued by pollution, environmental degradation and unsustainable resource extraction.
  • Without valuing natural capital and including it in our national accounts, we are making decisions without full information -- and we risk making poor decisions. Unvalued natural capital and uncosted environmental degradation can lead us to economic activity that will degrade our economy’s natural capital and put at risk its ability to generate goods, services and income into the future.
  • Efforts are underway to develop frameworks for including the value of natural capital in our national accounts. Measuring the value of our natural capital helps us to see where we are not using our resources optimally and allows informed decision-making about our economic activity.
  • Canada’s economy relies on natural capital. Using our resources more efficiently, and increasing their productivity, is crucial to Canada’s sustainable economic growth.

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About the Project

The goal of this project is to shed light on the relationship between economic activity and the environment by exploring the linkages between changes in our natural capital and our measures of productivity generally, and through the construction of an environmentally adjusted measure of productivity specifically.

While it is now commonly accepted that economic activity and the state of our environment are linked, many economic measures still fail to incorporate the environment – both the things we draw from it and the pollution we release into it. By developing and calculating measures of productivity that include natural capital, Canada may be able to better understand these linkages. This, in turn, may lead to the identification of strategies that can help Canada become more efficient and innovative in the use and protection of natural capital, and thus more productive and more prosperous.

Using the forestry sector as a case study, this project aims to construct an environmentally adjusted measure of multifactor productivity. In doing so, we aim to add another layer of understanding to the environmental and economic performance of this sector. The proposed measure will have relevance to the Canadian economy as a whole.