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This research identifies sectors reliant on natural capital in Scotland and quantifies the economic value of these nature-dependent sectors at national and regional levels. The methodology values our economy's dependence on nature, estimating £40 billion economic output and 261,000 jobs supported.

Executive Summary

The aim of this study was to determine the industrial sectors in Scotland that rely on high-quality natural capital in Scotland and to quantify the economic value of these nature-dependent sectors at a national and regional geographic level. To achieve this, WSP and Economics for the Environment Consultancy (eftec) developed and applied a methodology for measuring the reliance of the Scottish economy on natural capital.

Measurement of the reliance on natural capital is fundamentally linked to Scotland’s National Strategy for Economic Transformation (NSET), principally in relation to goals around restoring natural capital.

Using the preferred methodology, and recognising this will still undervalue the total contribution of natural capital, the analysis identified that in 2019:

• Industries reliant on natural capital, excluding non-renewable resource sectors such as oil and gas, supported £40.1 billion of total economic output – 14.4% of Scotland’s total output, and around 261,600 jobs, directly and indirectly;
• The industries most dependent on natural capital included: agriculture, fishing and aquaculture (88% reliant), forestry and wood products (59%), water and sewage (40%), spirits / wine and beer / malt sectors (30%), and electricity (30%);
• The Highlands & Islands Regional Economic Partnership (REP), and Glasgow City REP were estimated to have the largest shares of output and employment reliant on natural capital; and
• The Highlands & Islands, Tay Cities, and South of Scotland REPs had a high share of key habitats in Scotland. For these three REPs, these key habitats provided ecosystem services (identified using the preferred method) estimated to be worth £2.1 billion in output in 2019 for all economic sectors in the Scottish economy.

What is reliance on natural capital?

Natural capital is defined in Scotland’s NSET as “the renewable and non-renewable stocks of natural assets, including geology, soil, air, water and plants and animals that combine to yield a flow of benefits to people”. Natural capital reliance is where an economic activity is dependent on an ecosystem service in its value chain, including receiving material inputs, moderation of wastes and operating conditions, and customer motivations.

It should be noted that in this study the main analysis focused on a renewables-based definition of natural capital. This means that sectors such as oil and gas were excluded as they are non-renewable resources (i.e. resources that will not regenerate after exploitation within any useful time period). As part of sensitivity analysis, the non-renewable industries were considered.

Scotland’s economy relies on natural capital through:

(i) the direct extraction of resources from forests, arable landscapes, oceans and other habitats that exist in Scotland;

(ii) the provision of ecosystem services such as healthy soils, clean water, pollination, temperature regulation, a stable climate, recreational activities and tourism; and

(iii) support to workforce and population health.

Existing economic reporting frameworks do not easily capture the value of natural capital, due to four key challenges:

• Traditional economic indicators may provide a limited view of natural capital reliance;
• Many of the natural capital benefits of ecosystem services do not have a market value, therefore the value of natural capital may not accurately reflect the relative importance of natural capital to an industry;
• The purchase patterns in the economy that are available may not be of sufficient quality to be used to estimate the reliance of Scottish industry on natural capital products; and
• Scottish System of National Accounts data are a static representation of the economy in a given year, and therefore cannot show how the economy ‘re-adjusts’ to changes in natural capital.

A three-step methodology to valuing natural capital reliance

As a result of these challenges, this study adopted multiple methods to explore how natural capital reliance could be measured within and beyond the boundaries of the System of National Accounts and Supply and Use Tables. The methods were distinguished by their breadth of measurement and degree of alignment to existing statistics.

Method 1 provided a definition of natural capital reliance that drew on the existing System of National Accounts (SNA) data used to measure Scotland’s economic activity. While alignment to the SNA data enables replicability and updating of results, and a relatively straightforward calculation of economic impacts, its use in this study provided the narrowest measure of reliance on natural capital. Method 1 calculated the scale of economic activity in ‘core natural capital industries’. These included domestic expenditure by the following sectors: agriculture, forestry planting, timber removals, fishing, aquaculture, renewable energy, and water and sewage supply. These industries were identified as those that directly extract renewable resources from the environment and have a market value. However, how other downstream industries rely on these core sectors was not captured, nor was the economy’s reliance on regulatory and cultural ecosystem services.

Method 2 built on the Method 1 approach by additionally estimating the domestic expenditure of all other sectors in the economy on the core natural capital industries mentioned above. For example, economic activity of Scottish whisky was not captured in Method 1. However, by including the spirits and wine industries’ spend on water and sewage, and agricultural products, a more comprehensive estimate of NC reliance was achieved. Additional calculations to measure economic impacts still drew on the Scottish national economic data.

Method 3 built on the Method 2 approach by developing an index that attempted to capture industry reliance on a broad range of ecosystem services, and applying this index to expenditure values from Method 2. The index used the Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) database, which assessed the dependence of industry processes on natural capital. The uplift in expenditure from this index was used to estimate the non-market value of industry dependence on regulating and cultural ecosystem services. This additional expenditure moved beyond the Scottish economic data (SNA) underpinning the definition of natural capital reliance under Methods 1 and 2.

As depicted in the figure above, Method 3 expanded the measured size of Scotland’s domestic expenditure in industries that provided natural capital goods and services – from £7.9 billion under Method 2, to £11.2 billion under Method 3. This additional £3.3 billion represented the additional value of ecosystem services (e.g., surface water, flood and storm protection, water flow maintenance, ground water and erosion control) not captured within existing Scottish economic data (SNA). This domestic expenditure on natural capital can be considered as either: hidden within Scotland’s economic data boundary (SNA); or lying outside the envelope of the economy altogether, as shown in the figure above.

The following text provides a summary of the three main methods used to estimate reliance on natural capital, and the advantages and disadvantages associated with each.

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