Focus on Prince Edward Island

1. Natural Capital
A Small Island Perspective to Natural Capital:
Focus on Prince Edward Island

2. Natural Capital
This thesis follows the development of
natural capital economic theory. Since the
World Bank declared in 1995 that natural
capital represents one third of the globe’s
financial value, this economic theory of
value has grown in importance for all island
economies.
A case study of traditional
economic indicators (GDP based)
on Prince Edward Island reveals
a lagging economy unable to
reverse the long term decline in
economic development
outcomes or in the stock of
natural capital.

3. Introduction
E. O. Wilson’s biophelia hypothesis would propose that the human species has an
inborn need for nature which justifies the conservation of nature, both as a social
and a biological imperative. “We are human in good part because of the particular
way we affiliate with other organisms (Wilson, 1993).”
Wilson postulates that we have created massive change in the environment which
is resulting in the largest extinction of species on the planet since the dinosaurs.
In Canada, and in general, throughout the western world contrary commentary
suggests that the health of financial markets serves as an indicator of
sustainability for the industrialized economy.
“Canada has been blessed with abundant natural resources and these have proved
to be resilient. As the data provided here demonstrate—and contrary to the claims
of alarmists — environmental conditions today are better than they have been in
decades” (Diane Katz, The Frazer Forum 2009, p. 12).

4. Introduction
In theory, our natural environment can be
referred to as a stock of natural capital.
Although the value of nature in our
economy is more than just a financial
calculation based in GDP measures,
additional measures are more difficult to
quantify.
One of the best examples of this difficulty in measurement is that of the Gulf of
Mexico oil spill. This event generated an increase in economic activity and actually
represented GDP growth. It did so at a great cost to our stock of natural capital.

5. Research Methodology
This thesis was designed to isolate elements of natural capital economic theory which
would provide the most benefit for economic development on small islands.
Research in the natural capital economics reveals that several scientific disciplines are
establishing rational approaches to environmental values. The integration of findings
in biology, anthropology, sociology, and in ocean and atmospheric sciences, among
others, provides additional insight to inform economic development plans.
This thesis relies on traditional public sources of economic valuation and measure . I
reviewed published sources of statistical information available from the United
Nations, Statistics Canada, and the Statistics Division of the Provincial Treasury of
Prince Edward Island.
This type of baseline economic information is widely regarded as accurate, is
respected in many jurisdictions, and has been developed through rigorous work and
refinement over the years .
Although I argue at times that these classic measures of value are inadequate, and
present perverse outcomes of growth, their validity and acceptance in current
economic analysis is not in question.

6. Research Methodology
I have examined the development of global financial institutions which enable the
continued increase in production of goods and services in global trade.
I suggest that findings in natural capital sciences, supported by findings in the social
and cultural sciences, provide the theoretical foundation for the integration of natural
capital economic theory into island economies.
The validity of using the four pillars of sustainable economic development analysis,
(social, natural, cultural and financial) as presented in Agenda 21 is supported in this
thesis by the financial analysis provided from the World Bank, the U.K. Treasury,
statistics from Canadian state agencies, provincial statistical publications and
numerous widely published economic journal articles and books (Agenda 21, 1992;
NRTEE, 2003, 2009; Statistics Canada, 2001, 2010; PEI 2008, 2009; Stern, 2006; and
World Bank, 2004).
The economic reports I have reviewed on the value of nature and ecosystem services
were rigorous studies commissioned by national governments and international
organizations which have taken years, in some cases decades, to compile (IPCC, 2007).

7. Nissology
A fundamental premise of natural capital theory is the acceptance of limits to natural
resources and limits to growth. The founding definitions of which in global terms were
brought forward in the Club of Rome publication of ‘Limits to Growth’ by Roberta
Meadows et al in 1972 (Meadows, 1972).
Emerging evidence in nissology from studies in biology, physics, economics,
psychology, and sociology may provide answers as to why Prince Edward Island’s
economy and environment continue to decline.
The application of natural capital theories in small scale, closed loop micro-economic
production systems has provided promising results for capitalists, but on a
macroeconomic scale, success has not immediately apparent.
Nissology provides insights into common island experiences from around the world,
and informs economic theory with a multidisciplinary perspective on community
economic values which have developed as a result of known geographic limits.
Island economies provide opportunities for economic improvements to be, based in
science, and grounded in small island social and cultural reality.

8. Research Questions
Could the application of natural capital economic theory improve the profitability of
production systems and therefore increase the value of limited island natural
resources?
Bounded as islands are, by sea and sky, the island geographic entity provides
quantifiable limits and certain knowledge of the total economic value of nature within
those boundaries. Does the finite nature of islands provide an opportunity for the
application of micro-economic production models into macro-economic development
models?
Can biomimicry be adapted to small island economic theory?
Should the natural laws of science such as the law of thermodynamics and the law of
entropy, be incorporated into economic theory and practice?

9. Natural Capital
Natural resources (timber, energy and minerals)
contributed 22% to Canada’s total wealth in 2008. In
Prince Edward Island, this relative value is higher
because of the traditional reliance on natural
resources in the economy.
“We depend on natural capital to provide
provisioning services for the supply of food, oxygen,
water and building materials. Our natural capital
provides critical climate regulation services as well as
life supporting services that flow from the living
ecosystem. “
(2005) The Millennium Ecosystem Assessment
Report, Living Beyond our Means
http://www.maweb.org/documents/document.429.a
spx.pdf

10. Measures of Natural Capital
Natural Capital is often measured in terms of biodiversity. The more numerous and
diverse are the species in an ecosystem, the more capacity there is in that system to
rebound from shocks to the system.
Traditional economic development models convert forest into cropland, rivers into
reservoirs, and marshes into parking lots. This conversion does not end all natural
processes, but does tend to produce a less diverse landscape excluding many of the
species previously occupying the space.
The summary of the Millennium Ecosystem Assessment (MA) is that the stock of
natural capital is in decline on a global scale.
Some of the clearest evidence of the pressure we are putting on nature comes from
evidence of the decline of wild fish and fresh water; both natural capital assets which
were previously thought of as free gifts from nature.

12. The problem statement in an island context.
The world history of economic development repeats itself in a cycle of population
growth, followed by destruction of the environment, resulting in an ecological disaster,
and ultimately ending with a population crash.
Ronald Wright describes the historic cycle resulting from the loss of tree cover on
islands and in continental situations as a process which eventually leads to the
collapse of the underlying agricultural and system and a breakdown of the social order.
“Once nature starts to foreclose – with erosion, crop failure, famine, disease – the
social contract breaks down” (Wright, 2004, p. 84).
The ‘cultural tradition of avoiding hostility, which is typically found on small islands, is
perhaps one illustration of a significant contributing factor to what E.O. Wilson
describes as the larger world problem which is a lack of self-understanding and a
“Paleolithic” obstinacy to change (Wilson, 2002).

13. Ecosystem Services flowing from Nature
Nature provides a wide variety of services from a stock of natural capital.
Think of these services as similar to interest payments from a stock of financial capital.
In a bank account. Just as a stockpile of financial capital is required to return
significant interest payments, a stockpile of natural capital is required to return an
adequate annual flow of nature services.
Life-supporting natural system services include nutrient cycles, soil formation cycles
and primary food production cycles.
Human provisioning services from nature include the delivery of food, water, wood,
fiber and fuel.
Regulating services from nature include climate regulation, water purification services,
flood and tidal surge regulation as well as disease regulation.
Cultural services from nature are received in aesthetic, spiritual, educational and
recreational benefits.

14. Natural Capital
Methods of Measurement
Traditionally, natural capital has been divided into three categories
• renewable resources
• non-renewable resources
• and continuous resources generated from thermodynamics such as tidal, solar,
geomagnetic and wind energy.
Natural capital theory now expands these definitions to include among other values
• non-use values as well as use (consumption) values
• non-marketed values along with marketed values, these could be illustrated by the
air we breathe or the water we drink
Many non-use and non-marketed values support indispensible contributions to
human welfare and the financial economy in built capital, human capital, social capital
and natural capital.

15. Non Use Nature Values
part of a total economic value framework
Inter-generational equity values, the sharing of present resources with those we live
with.
Intra-generational values, the preservation and passing of natural resource values to
future generations.
Bequest values, knowledge that future generations might benefit as we did.
Existence values, derived from that knowledge that something simply exists; i.e.: a
polar bear to someone who has never seen one.
Option values exist in the ability to reserve use for a later date yet undiscovered
natural capital values such as the elusive cure for an incurable disease in a tropical
rainforest.

16. Natural Capital Law
The law of thermodynamics is a fundamental natural capital law. these natural
processes are irreversible.
The first law of thermodynamics is that energy can be transferred from one system to
another in many forms, but it cannot be created or destroyed.
The second law of thermodynamics is that natural processes that involve an energy
transfer must have one direction which dictates a declining level of energy at each
transfer, and that these natural processes are irreversible. Entropy dictates that energy
available in a closed loop system only decreases with use
These natural capital laws of science have been described as “immutable, irrevocable,
written in stone” (Boyd, 2003, p. 350). This statement of fact is hard to dispute on any
grounds, as the Natural Law of Gravity would tend to provide concrete evidence to any
contrarian.

17. Natural Capital Values in Canada
2005: Mark Anielski, Sara Wilson. The Pembina Institute. Counting Canada's
Natural Capital: Assessing the Real Value of Canada's Boreal Ecosystems
This study examined the ecosystem goods and services provided by Canada's
boreal forest region, including water storage and purification, climate
regulation, and carbon storage.
The economic value of the non-market services provided by the boreal region
is estimated at $93.2 billion per year. By comparison the net market value of
resource extraction activities measured in terms of GDP is estimated at $37.8
billion.
The value of the current total carbon stored in Canada's boreal forest is
estimated at $3.7 trillion.
Flood control and water filtering services are identified as the most
economically significant service provided by the boreal, with an annual value
of more than $80 billion per year.

18. Prince Edward Island
Natural Capital Measures
2001 – Ken Belcher et al. Ecological Fiscal Reform and agricultural landscapes;
case study of Mill River watershed. Ducks Unlimited.
Ecosystem services from agricultural land are valued at $237 per hectare per year.
(At a simple 5% rate of return this would indicate a natural capital asset value of
$4,740 per hectare.)
2002 - Martha McCulloch et al: Coastal impacts of climate change and sea-level
rise on Prince Edward Island, Geological Service of Canada.
Salt marshes are valued in excess of $20,000 per hectare capital value.
(At a simple 5% rate of return this would indicate a flow of ecosystem services
valued at $1,000 per year.)

19. Prince Edward Island
Natural Capital Measures
The Province of Prince Edward Island released a ‘State of the Environment
Report’ in 2003. This report was the first to publicly quantify environmental
quality and was created to contribute to public awareness and allow for
informed decision making in all sectors of society.
“The Island’s economic potential is firmly rooted in sectors which rely on
natural resources. The quality and sustainability of these resources is critical
to agriculture, aquaculture, tourism, forestry and the fishery. It is also an
important factor in quality of life for Islanders.”
This report identified measures of natural capital in terms of drinking water
quality, surface water quality, climate change, energy use, air quality,
biodiversity, pesticide use, waste management, soil quality, land use and
environmental stewardship.

20. What I found.
Deterioration in PEI Natural Capital
Water quality has declined. the appearance of nitrates and phosphorus ins surface and
ground water is good example.
Natural food sources have declined, the loss of species like Atlantic Salmon and
Atlantic Cod.
There is an increased risk of contamination from chemicals used in manufacturing and
agriculture, as well as contaminant discharges from sewage treatment plants and
untreated sewage systems.
The extirpation of species from PEI, such as the river otter, the pileated woodpecker,
the pine martin.
The increase in species at risk such as harbour porpoise, fin whale, leather back turtle,
striped bass, American eel, winter skate, Atlantic cod and Atlantic Salmon.
The deterioration of island forest cover since the arrival of Europeans on PEI.
The loss of organic matter content in soils as well as the increase in soil errosion.

21. What I found.
Deterioration in the PEI Economy
Stagnation in employment, unemployment continues to remain over 11% for the last
20 years.
Productivity has stagnated at slightly over 70% of the Canadian average, there has
been no change since the Development Plan of the 1970’s when it moved from 55% of
the Canadian average.
Health care costs are increasing, government spending on health care continues to
outpace increases in GDP economic activity. Health care costs Increase at a rate of 6%
annually while the economy is growing at rate of approximately 2%.
Dramatic increases in imports since the connection of the fixed link to the mainland.
The provincial trade deficit increases at a rate of 2.5 times the rate of export growth.
For every marginal dollar of export earnings, $2.50 is spent on import to create this
new product.

22. What I found.
Deterioration in the PEI tourism industry.
Employment creation on the island is dependent on seasonal enterprises which create
half of all new jobs in the island economy. Tourism presents a significant economic
engine for the island with 10% of total economic activity. There is widespread
agreement that the island tourism industry is in decline, and that this decline in
visitation is long term and island wide, although it does seem to be more acute in rural
areas. The global tourism industry, in contrast, has been growing.
Traditional economic development schemes, have created lower income job
opportunities and economic uncertainty for a high percentage of island workers. Small
island tourism throughout the world mirrors the decline in tourism visitation to PEI.
Common problems include a lack of job security, advancement, and training
opportunities, medical benefits and long term pension plans. Cultural pressures on the
island encourage workers to migrate to long term full time employment opportunities,
and young people generally do not consider seasonal work to be a viable career
option which results in an increasing exodus of youth.

23. Rationale for Island Action.
“Once broad goals are democratically arrived at, they can be used to limit and
direct preferences at lower levels. For example, once there is general consensus
on the goal of sustainability, then society is justified in taking action to change
local behaviors that are consistent with this goal. It may be justified, for
example, to attempt to change the preferences for driving automobiles, or the
price of doing so…” (Carl Folke, Robert Costanza, 1997).
“Where externalities occur, private markets cannot operate efficiently in the
context of optimizing social welfare and market failure occurs. Externalities
provide the fundamental economic justification for the existence of governments
and their provision of public goods not supplied by the private markets” (Barton,
1999, p. 210).
“Ultimately macroeconomics is required to express the value of ecological
systems and species in monetary terms. That is, all things that appear in
national and international accounts appear with a monetary value or as index
that reflects monetary values” (Fenech, 2003, p. 16).

24. Rationale for Island Action.
The citizenship rationale for action is the nationhood rationale.
The island rational is that Prince Edward Islanders ought to have access to
certain key Canadian environmental rights as defined by our constitution,
parliamentary law, and international treaty. Since some of these rights fall
under provincial jurisdiction, it is imperative that the island province have
adequate funds to act within its jurisdictional capacity.
The federal rationale for supporting the improvement of natural capital
sustainability in Prince Edward Island is basic. In order for the federal
government to full fill its responsibilities to Canadian citizens, Prince Edward
Island needs the financial capacity to act in areas of shared federal/provincial
jurisdiction.

25. Conclusions
The underlying premise of natural capital economics is that nature is the primary
engine of growth; the laws of nature determine the outcome of any activity. The
economy is a subsidiary of the environment.
The case study reveals a declining quality and stock of natural capital present in the
environment on Prince Edward Island largely because of the resource exploitation
model of economic development in the past. Over the last several decades, despite
our best efforts to improve the economy, stagnation continues to be a long term
economic trend on Prince Edward Island.
The continuing decline in nature values and the long term stagnation of the Prince
Edward Island economy would lead one to the conclusion that the present economic
development paradigm (free market business models combined with government
regulation) is not working for either nature or the economy.
In fact, it appears, this scenario prevents the island from achieving long-term
economic sustainability goals.

26. Conclusions
It is clear that free markets do not provide an incentive to preserve nature.
It should be clear that we must place value on limited natural capital resources.
Ecological economics illustrates financial metrics for market mechanisms to function
and internalize these values in closed loop micro-economic production systems. These
systems are ideally suited to island economies.
Community consultations matter.
As capacity is developed in the planning and delivery of community services on a local
level, the benefits of economic growth on the island will be shared on a more
equitable basis across all sectors of society. There is a high degree of certainty in the
effectiveness of this approach to economic development , contributions to
participatory democracy will lead to a stronger, more resilient island society.
Habitat restoration opportunities present an immediate opportunity to improve the
value of our environment.
Biodiversity protection in the working landscape is seen as a necessary first step for
the island.

27. Conclusions
Protected Area Land Assembly
The identification and preservation of lands which serve as the core of a protected
area land use plan will provide ‘biodiversity hotspots’, an important first step for any
island to preserve biodiversity.
Ecological Tax Reform.
Stop counting the consumption of natural capital as income, tax labour and income
less and tax resource use more, maximise the productivity of natural capital in the
short run and invest in increasing it’s supply in the long run, and invest in domestic
production for domestic markets as the first option.
Establish a Carbon Market.
Use carbon sequestration as a proxy for nature preservation. Cap and trade systems
have been used successfully in Canada in the past. Cap and trade systems are non-
countervailable under international trade laws.

28. Conclusions
Adapt to Climate Change.
Plans for long term sustainability must include the development of alternate locations
for the installation and future development of critical public infrastructure.
Initiate Import Replacement Schemes.
The lessons learned from the study of small islands is that, as off island remittances
grow in importance, cultural and economic independence is diminished.

29. Photo and Chart Credits
The owl and the oak tree. Personal property of Douglas Deacon
Planet Earth. NASA, http://www.nasa.gov/
Prince Edward Island satellite image.
NASA , http://www.nasa.gov/
Gulf of Mexico oil spill. CBS Interactive
http://news.cnet.com/8301-17938_105-20003460-1.html
Collapse of the cod fishery. Millennium Eso-sytem Assessment