Deflating natural capital: Measuring the real value of freshwater ecosystem services
By Alice Bartolini, Joe Grice, Paul Ekins, Martin Weale, and Silvia Ferrini
Nature provides us with fundamental services that benefit people and the economy, including beautiful landscapes where we can spend time and natural resources such as timber, fish, and fresh water. Recognising the economic value of these services and the assets underlying them is essential for informed policy decisions, sustainable resource management, and ensuring that nature is properly reflected in national statistics. Natural capital accounting frameworks, such as the System of Environmental–Economic Accounting–Ecosystem Accounting (SEEA EA), aim to do so by integrating the value of natural assets and services into national accounting systems.
But measuring the value of nature is only part of the challenge. Just as we track whether the economy is growing in real terms by removing the effects of inflation from GDP, we need to do the same for natural capital. To do so, we need deflators, tools that separate changes in the volume of ecosystem services from changes that are due to price movements. Yet, no established methodology exists for constructing them, and current practice typically applies the GDP deflator to natural capital estimates.
Our new ESCoE discussion paper addresses this gap by proposing both a theoretical framework and an empirical approach to construct specific deflators for ecosystem services in line with standard accounting practices. We focus on freshwater ecosystems, as they provide fundamental services to the economy and society and underpin life. Among these services, we consider water provisioning and water-based recreation and tourism provided by freshwater ecosystems in England. We build both service-specific and combined deflators, and track how both total value (in monetary terms) and the actual volume of services change over time.
From a national accounting perspective, service-specific price deflators matter because they allow us to separate price changes from changes in the actual quantity of ecosystem services provided. At the same time, a combined deflator is needed to assess overall trends across services and to ensure consistency with standard economic indicators such as GDP.
International practice, as outlined in the SEEA-EA, and followed for example by the UK Office for National Statistics (ONS), is to deflate natural capital nominal values of ecosystem services and ecosystem assets using a measure of price change in the economy such as the GDP deflator or the CPI.
By contrast, our approach deflates natural capital services using their own specific price movements. And by combining service-specific deflators through a Paasche index, the resulting aggregate deflator connects directly with the GDP deflator. This is a significant advantage over current practice.
We looked at two key water-related ecosystem services (water provisioning and water-based recreation and tourism), and constructed separate deflators for each, and a combined deflator for both. We also developed measures to track their overall value and the volume of each service provided.
For water provisioning, both the volume of water abstracted and unit prices remained relatively stable over 2009–2018. As a result, the deflator and overall value followed very similar patterns. However, the volume index (that reflects the actual amount of water provided), stayed consistently higher, suggesting that movements in the monetary value of the service were driven by price movements rather than changes in water supply.
For water-based recreation and tourism, prices and visits fluctuated dramatically, particularly around 2020. That year, a drop in unit prices coincided with an increase in visits. This likely reflects a change in the underlying survey methodology, which introduces a break in the series and limits comparability before and after 2020, and changes in behaviour during the COVID-19 pandemic.
When looking at the overall picture (Figure 1), the three measures show considerable variability, largely driven by recreation and tourism. The results illustrate a broader point: relying on monetary values alone can give a misleading picture of what is actually happening to the volume of ecosystem services provided. Building robust deflators requires long, consistent time series of both prices and quantities, which remain a work in progress.
The main challenges relate to data availability and consistency. For water provisioning, estimates rely on Defra abstraction statistics, which are currently only available up to 2018. This limits how far the analysis can be extended over time.
For water-based recreation and tourism, estimates start from 2011, and the shift from the Monitor of Engagement with the Natural Environment (MENE) survey to the People and Nature Survey (PaNS) between 2019 and 2020 introduces a break in the series that affects comparability across the full period.
More broadly, constructing meaningful deflators requires long and consistent data on both prices and quantities. For many ecosystem services, this type of data is still limited.
This blog explores how to measure the volume of freshwater ecosystem services from natural capital by developing service-specific deflators. Focusing on water provisioning and water-based recreation and tourism, it shows how separating price changes from changes in the actual volume of services provides a clearer picture of trends over time. The findings highlight the limitations of relying on standard GDP deflators and demonstrate the importance of service-specific approaches. They also underline a key challenge: without long, consistent data on prices and quantities, it remains difficult to accurately assess how ecosystem services are truly changing.