The European Central Bank published a Discussion Paper, “The economics of natural capital”, presenting a framework that treats natural capital as both a productive input and a source of household wellbeing, and derives implications for growth and policy. The authors conclude that while firms have incentives to conserve natural capital to sustain future production, private conservation is generally below the social optimum, creating a case for complementary public conservation. The model embeds labour, produced capital and natural capital in the aggregate production function, with production depleting natural capital that can regenerate and be increased through costly conservation by firms and a public authority. Because firms do not internalise the non-productive “enjoyment” value of nature and place relatively greater weight on current output, the framework implies underinvestment in conservation absent public action. Using region-level forest biodiversity data for 582 regions across 44 countries and the Mean Species Abundance index, the paper reports higher biodiversity in publicly owned forests, with the regression coefficient on the share of state ownership estimated at 0.0883 and a comparison suggesting 50% state ownership is associated with about 13% higher biodiversity than fully private ownership, while also finding only a roughly 9% gap between fully public and fully private forests. The paper highlights open questions for policymakers, including whether central-bank forecasting models and estimates of potential output should incorporate measures of natural-capital degradation, and how to balance public ownership of natural capital with regulation of privately held natural-capital assets.
European Central Bank 2025-12-19
European Central Bank publishes discussion paper modelling natural capital in long-run growth and the role of public conservation
The European Central Bank's Discussion Paper, "The economics of natural capital," examines natural capital as a productive input and a source of household wellbeing, emphasizing the need for public conservation alongside private efforts. Using forest biodiversity data, it shows higher biodiversity in publicly owned forests and suggests central-bank models may need to consider natural-capital degradation. It questions balancing public ownership with regulation of private natural-capital assets.