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Natural
Capital: A Critical Foundation of Our Economy
Investing
in Canada’s Natural Capital
1.1
Introduction
Formed in 1994, the National Round Table
on the Environment and the Economy (NRTEE) is a publicly funded,
independent advisory body reporting to the Prime Minister.
The NRTEE’s mandate is to provide policy advice and
recommendations to governments and the public on promoting
sustainable development in Canada.
The particular value of the Round Table’s
recommendations derives from the way it brings relevant stakeholders
together in a neutral forum where they can openly discuss
critical issues and work together to find solutions. The NRTEE’s
25 members represent decision makers and opinion leaders in
a broad range of sectors, including business, labour, academia,
environmental organizations and First Nations, as well as
diverse regions across the country.
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The NRTEE focuses on improving understanding of and
identifying solutions for key issues that lie at the intersection
of the environment and the economy. In its ongoing work, it emphasizes
the important role that environmental (or natural) capital plays
in supporting Canada’s continued economic and social well-being.
A key interest is to ensure that the marketplace considers the full
benefits and costs of economic decisions, including their impact
on the environment. The NRTEE’s recommendations are designed
to help correct the market distortions caused by policies, practices
and market failures that favour unsustainable practices over realistic
sustainable options.
Because the NRTEE recognizes the significance of
fiscal policy in influencing decision making across a wide spectrum
of issues, most of its program recommendations include detailed
fiscal policy reforms, such as changes in tax treatment; the elimination,
redirection or development of new tax incentives; and revised or
new program spending to support the desired outcomes.
The NRTEE’s budget submissions to the federal
government, which have been made annually since 1996, are compendiums
of selected recommendations from NRTEE program reports. As such,
these recommendations have not only been approved by Round Table
members, but they have also been influenced by the extensive multistakeholder
consultations involved in their development.
This year’s budget submission once again reflects the importance
of fiscal policy in influencing decision making in Canada. It represents
an important step toward the integration of sustainability considerations
into federal fiscal policy.
1.2
The Role of Natural Capital in Canada’s Economy
The NRTEE’s 2004 Greening of the Budget submission
emphasizes that Canada must take better account of the full range
of assets that will be necessary to sustain a healthy society and
economy. These assets represent our nation’s “capital,”
an economic term first used to designate entities such as buildings
and equipment that ensured economic production in the future. This
submission emphasizes that other types of capital – in particular,
the environmental assets that provide the ecological “services”
that make life possible – are also important to our future
well-being.
Canada must start to explicitly integrate consideration
of all the key types of capital into fiscal policy. Preserving development
options for future generations depends on the availability of a
wide range of assets or capital. These assets include produced capital
(such as machinery, buildings, transportation networks and other
durable goods), natural capital (the provision of space for living
in, raw materials and a clean and stable environment), human capital
(the knowledge and skills embodied in individuals), and social capital
(the countless human interactions necessary for a vibrant and well-functioning
society). The concept of sustainable development requires that subsequent
generations have the necessary capital of all types – and
certainly no less than we do – to pursue their own goals.
In order to uphold this principle, federal budgets need to account
for the full range of our national capital.
Natural capital is a particularly important component
of national wealth. For many Canadians, it provides spiritual and
aesthetic benefits. Our vast geography, abundant wilderness and
relatively clean environment help define our local and national
identity. But natural capital also supports economic activity by
providing not only the raw materials and the land on which we live
and work, but also the many ecological services that support life,
including the cleansing of fouled air and water, and the provision
of productive soil.
Like produced capital, natural capital can be degraded,
for example, through modification of land areas and excessive waste
loadings. It can be very difficult, and in some cases impossible,
to replace lost natural capital – it is harder to create new
wetlands than it is to build a new factory. It is possible, however,
to rejuvenate, enhance or even avoid the deterioration of many types
of natural capital through environmentally sustainable practices.
The federal government has made concerted use of
the budget to promote policies and behaviours that stimulate the
creation of produced capital through measures to enhance innovation
and productivity. However, it has not focused as much attention
on the equally important opportunities to use fiscal policy to ensure
the continued productivity of our natural capital. In a growing
range of circumstances, a lack of quantity or quality of natural
capital (in the form of clean air and water, productive soil, a
predictable climate or a reliable source of raw materials) may become
an important factor limiting economic production.
Fiscal policy clearly needs to pay more attention
to sustaining and rejuvenating this important aspect of our national
wealth. Consequently, this submission identifies three groups of
recommendations to ensure that our fiscal policies systematically
integrate environment–economy considerations and explicitly
recognize the role of natural capital in helping to maintain a prosperous
economy. These are:
Improving the information base
on natural capital. Section 2 includes recommendations
to improve the base of information on the status of Canada’s
natural capital, recognizing that good information is a prerequisite
to informed decision making. An important aspect of these recommendations
is creating the ability to link information on natural capital to
economic data by expanding the System of National Accounts.
Helping rural and Aboriginal communities
protect natural capital. Section 3 recommends the
provision of incentives and information to help rural and Aboriginal
communities steward the natural capital that forms both an important
basis of their livelihood and an irreplaceable part of our national
heritage.
Protecting natural capital in urban
communities. Section 4 focuses on the important role
federal fiscal policy can play in ensuring that Canada’s urban
centres – a key component of our produced capital –
function as effectively as possible and with minimal adverse impacts
on natural capital (such as surrounding agricultural lands and air
quality). These recommendations are designed to help enhance the
well-being of urban residents, and to ensure that our cities remain
attractive, stable centres for business and talented workers.
1.3
The Impact of Fiscal Policy on Canada’s Natural Capital
The recommendations in this submission should be
seen as important starting points in a long-term process of reform
directed at ensuring that each federal budget more fully accounts
for natural capital.
By overlooking natural capital considerations, some fiscal policy
measures have had profound yet unintended environmental implications,
and are contributing to the loss of natural capital even as they
attempt to meet social or economic objectives. The result is an
accumulating natural capital debt, similar in some ways to the financial
debt that has been the focus of many of the federal government’s
recent budgets. Although previous budgets have emphasized improving
the quality of life by reducing the financial debt and making strategic
investments in jobs and productivity growth, few have paid as much
attention to sustaining the natural capital that also supports Canadians’
well-being.
In addition to avoiding unintended harm to the environment,
a long-term commitment to budget reform should also focus on the
systematic use of fiscal policy to create positive incentives for
more sustainable forms of development. The NRTEE has identified
“ecological fiscal reform” as one of the most powerful
and efficient, yet underutilized, policy options for promoting sustainable
development. Ecological fiscal reform is a strategy that redirects
a government’s taxation and expenditure programs to create
a cohesive, integrated set of incentives to support the shift to
a more sustainable form of development.
Canada has made limited progress relative to many
OECD countries toward adopting ecological fiscal reform or integrating
natural capital objectives systematically into its fiscal policy.
This means that Canada may not be addressing its environmental problems
as cost-effectively as other countries. More fundamentally, without
integrating natural capital considerations more fully into our fiscal
policy, Canada will miss opportunities to ensure that future generations
have even greater options for development than we currently enjoy.
Next 
Improving
the information base on natural capital
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Investing in Canada's Natural Capital