Natural capital: economic benefits assessment

Economic impact of nature related markets and investments

The environment-economy model

The environment-economy model was generated in Microsoft Excel using the results of the natural capital market review, stakeholder engagement and desktop review. The model uses input data (amount of investment in pounds or area in hectares) on the different natural capital interventions to estimate the economic benefit from the proposed investment in a given region or portfolio. The economic impacts of the natural capital investment portfolio are then reported by the natural capital interventions and summarised accordingly to the different SIC codes and by GFI outcomes.

The environment-economy model process is show in Figure 4 below.

The environment-economy model in this project built on the work undertaken as part of the previous Scottish Government project on "Understanding the local economic impacts of natural capital investment" (2022)^[15] by using the input-output models developed in the 2022 project to link the quantity of investment in natural capital to economic impacts.

The previous input-output models provide a comprehensive list of potential component activities within each natural capital activity (what is termed a natural capital intervention in this report) and assigned an expected cost, dependent on the intervention characteristics. Using a fixed set of assumptions, the environment-economy model used the outputs provided in the input–output models to estimate the economic impact from a user-defined set of natural capital interventions and then summarises the results to demonstrate where there is overlap between investment-specific activities across the different natural capital interventions and GFI outcomes. In addition, likely job leakage was reported for each component activity included in the model.

Environment economy model guide

For this project, one overarching environment-economy model has been developed and should be used in the same manner. However, the results produced will be unique depending on the input values (area in hectares, investment in £) and the cost values entered into the reference sheets.

The model contains 19 separate sheets shown below in Table 8:

Further information on the different elements of the model and how to interpret them is provided in Appendix B. Screenshots from the model have been included for illustrative purposes. However, this part of the report is best read in conjunction with the models themselves, which are available as standalone supporting documents to this Final Research Report.

Mapping GFI outcomes to the environment-economy model

The relationship between the GFI outcome categories and the different types of natural capital interventions was established through desktop review and expert opinion. The outcomes of the analysis and the GFI categories that each natural capital intervention contributes to are shown in Table 9Error! Reference source not found.. This matrix means that the model can summarise economic outputs by each GFI outcome.

As part of the project, an analysis was run to estimate the potential economic impacts of a hypothetical portfolio of natural capital investment that could address the full GFI nature finance gap for Scotland until 2032 (the 'finance gap investment' as per the previous chapter). This was to provide an illustrative example of model functionality. The assessment used the required spend values identified in Chapter 2 as input for the models (i.e. £ of investment). To estimate the potential economic output of the total investment in the different GFI categories in the model, the total investment amount for each GFI outcome was apportioned across all relevant natural capital interventions equally. The total investment amount combines committed public investment and the additional investment that would be required to address the finance gap. Committed public investment (see Table 4) assumes public investment is certain and therefore can be modelled. The reduction in the finance gap is measured by the GFI finance gap figures over 10 years (see Table 7)^[16] to give a total value. The input values used in the model are shown in Table 10. The area / distance created values were generated from the investment amount using the predetermined ratios in the references data.

Results from the modelling show that the public and private investment required to address the GFI nature finance gap for Scotland of £12.5bn would generate an estimated output effect of £17 billion into the Scottish economy, meaning that every £1 invested would generate £1.35 for the economy. In terms of jobs, the potential economic impact could be 146,020 direct and 197,380 direct and indirect jobs created or existing jobs sustained. These jobs are likely to be in industries such as silviculture, renting and leasing of agricultural machinery and equipment, and support services to forestry and hunting. These economic benefits are, of course, additional to the many wider social and environmental benefits that would accrue from such a significant investment in nature restoration. These wider benefits would be reflected over time in measures within the Scottish Natural Capital Accounts^[19] (NCA) and the Natural Capital Asset Index^[20] (NCAI).

Table 11 shows the capital expenditure, jobs and output effect broken down by SIC industry codes. The largest output effect was within the SIC category 2.1: 'Silviculture and other forestry services' with a value of £4.4 billion and 66,990 direct and indirect jobs created or existing jobs sustained. The other major SIC categories were 'Renting and leasing of agricultural machinery and equipment' and 'Support services to forestry'.

Of the 197,380 direct and indirect jobs, 190 jobs may be leaked outside of Scotland. Although this is a small percentage of the total jobs created as part of the investment, investment in appropriate local training and skills provision could better position the region or Scotland to better retain these jobs within Scotland. However, leakage of jobs following natural capital investment in regional economies in Scotland is likely to be much more significant, as explained in the next chapter. Table 12 shows the output effect arising from the natural capital intervention phased over the short, medium and long term.

Table 12: Natural capital interventions by output effect and time horizon

Table 13 shows the jobs effect arising from the natural capital intervention phased over the short, medium and long term.

The following table provides a breakdown of the cost per hectare (or meters, in the case of access creation) for each natural capital intervention. The table shows that the highest cost per hectare is for river re-naturalisation and natural flood management (£8,858 per hectare), followed by peatland restoration (£7,697 per hectare), while the cost is lowest for access creation (£30 per meter).

Note: The costs for each natural capital intervention are based on previous calculations undertaken for the report Understanding the local economic impacts of natural capital investment. No further investigations into the cost per hectare were undertaken for this study.

Model interpretation, accuracy and assumptions

In summary, the environment-economy model converts either the total investment (£) or area of land (ha) inputted in by the user for a range of natural capital interventions into economic impacts (jobs and output metrics).

The expected investment (£) to intervention area (ha) ratio used to generate these relationships was taken from the input-output models generated as part of the previous Scottish Government project "Understanding the local economic impacts of natural capital investment" (2022) and are therefore reliant on their accuracy.

The model converts the expenditure on natural capital interventions into the economic impacts within a particular region or the whole of Scotland (as shown in the example) including the output effect, which is defined as the ripple effect of the expenditure through the supply chain. This ripple effect is measured by multipliers used within the Input-Output tables. Multipliers are measures of the way in which an increase in activity by one firm will lead to an increase in activity by other related firms. For example, the contractor who installs deer fencing buys timber, the timber merchant buys new tyres for their trucks, all the firms' workers spend their wages on food or consumer goods, and so forth. Hence, the output effect captures the direct and indirect impact of any investment in the economy. Direct and indirect jobs are calculated by multiplying the employment effect multiplier with investment and output effect respectively.

It should be noted that the model treats investment as a one-off injection of capital rather than a profile of investment over time, so as the economic impacts are timebound, many of the jobs estimated within the model may be temporary / relatively short-term during the creation or restoration of the habitat in question. The model does allow for the investment to be in the short, medium or long term future in line with the GFI assumptions. A proportion of jobs will, however, be permanent and these are often captured within the maintenance and management activities listed within each intervention.

The environment-economy model was developed using the best available information and standard cost rates for each individual activity required as part of each overall natural capital intervention. This was done using an average value for the whole of Scotland using data from stakeholder engagement and literature reviews. The values within the model represent an average of the cost for each activity across a variety of factors including the scale of the intervention, the geographical location and socio-economic context.

The environment-economy model allows the user to replace or supplement the existing cost data and job types with regional-level information which would modify the relationship between the site characteristics and the magnitude of each activity. This will enable users to ensure the model is appropriate to the scenario they wish to assess. However, justification should be provided whenever elements of the reference data sheet are edited.

As part of this project the economic environment linkages for the marine GFI outcomes within the different natural capital interventions have been excluded from the overall environment-economy model. This exclusion was required due to the lack of detailed input-output models for marine natural capital interventions such as were available for the terrestrial natural capital activities. This lack of information was due to the special nature and greater uncertainty within the marine environment. In addition, the marine environment was not included within the previous Scottish Government project "Understanding the local economic impacts of natural capital investment" (2022). It was therefore beyond the scope of this project to generate primary values for the economic environment linkages within the marine environment for use in the overall environment-economy model.

The inclusion of the marine environment provides a suitable avenue for further research and development to build on the work done as part of this project. Further work could be undertaken to develop input-output models for the marine activities mentioned in the GFI outcomes, such as "Ensure seafloor habitats are healthy and sustainable".

The model is anticipated to support early-stage business cases and provide an initial estimate of the investment, output effect and number of jobs created by natural capital investment. However, it should not be used to support full business case analysis of local level projects without additional information.