Nature's Bank Account

Money doesn’t grow on trees, so how do we put a monetary value on nature?


The University of Minnesota's Stephen Polasky leads Accounting for Nature, an IonE research project focused on changing economic activities to ensure long-term sustainability while meeting the near-term needs of people.

The best things in life are free—an evening with friends, a summer day at the lake, hiking in the forest on a crisp autumn morning. But just because these things are free doesn’t mean we can take them for granted. Maintaining relationships with people and maintaining the environment both require thoughtful action and investment. If we want these “best things” to remain, we need to focus on what builds our communities and nourishes our environment at the same time.

In the past few centuries, humans have dramatically transformed the planet, in good ways and bad. Our quality of life has improved with increases in food production, as well as better health care and education. Yet, humanity has not invested sufficiently to maintain environmental quality. Deforestation, expanding deserts, emergence of dead zones in coastal waters, loss of biodiversity and climate change are just a few consequences of our collective failure to properly care for the environment. And either we, or our descendents, will pay the price.

Environmental degradation causes harm to people by damaging health, reducing productivity and jobs (as seen with the collapse of fisheries), and potential large-scale disruptions from climate change. Some of these damages are hard to quantify, such as reduced quality of life when local lake water becomes clouded with algae, or when a favorite natural area is developed. Even so, these values are real and vital.

Most prices we pay for goods and services do not reflect the full impacts of our production or consumption choices on the environment. Before we can see what fundamental changes are needed to fully sustain the environment, we must begin to incorporate the value of nature in our economic and political decision making. This presents three complex, albeit surmountable, challenges.

First, we must recognize that we don’t always know the environmental costs of our actions. For example, chlorofluorocarbons were promoted as a cheap and effective chemical for refrigeration and a propellant for aerosol cans. Not until 40 years after their discovery were CFCs linked to destroying the ozone layer that shields Earth from ultraviolet radiation.

Second, we must translate our actions—and the intended or unintended results—into environmental values we can compare with other values, such as increased income or jobs. Economists have already made great progress in valuing certain environmental benefits. For example, we can infer the value of nature to homeowners by analyzing how housing prices increase with access to lakes, a scenic view or other environmental amenities.

And third, we must bring the values of nature to bear in our decision-making processes. Innovative public policies, such as incentive-based regulations, and private initiatives, such as environmental certification, harness market forces for environmental protection, showing it is possible to protect the environment—even in a rising economy.

In spite of the challenges, we’ve already seen how progress on both the environment and the economy can be made. Following the passage of the Clean Air Act in 1970, emissions of major air pollutants in the United States were cut in half by 2005, while the economy nearly tripled in size. The Clean Air Act made reducing air pollution a priority, helping to usher in new technology and smarter policies to improve the environment within a growing economy.

Our understanding of the links between human actions and environmental impacts has improved rapidly in recent years. What we need now is to account for a broader range of nature’s goods and services in our daily choices. By accounting for the natural world, we can preserve the best of both worlds: a better environment and a better quality of life.

STEPHEN POLASKY is a professor of ecology and environmental economics at the University of Minnesota and a resident fellow of the Institute on the Environment.