Natural capital: regional economic reliance analysis

1. Introduction

1.1 The importance of Natural Capital to the Scottish Economy

This report builds on the "Importance of Natural Capital to the Scottish Economy"^[1] analysis published in 2024. The analysis aims to better understand how nature underpins our economic activity in Scotland, and to evidence how the twin crises of biodiversity loss and climate change are impacting our economy, society, and wider wellbeing. This report offers an accompanying write-up to the main infographic output and aims to provide more detail on natural capital reliance at a regional level.

Natural capital is defined in Scotland's National Strategy for Economic Transformation (NSET) as “the renewable and non-renewable stocks of natural assets, including geology, soil, air, water, plants and animals that combine to yield a flow of benefits to people.” Natural Capital has three main components:

• Stocks: ecosystems and diverse habitats
• Flows: goods and services from habitats
• Values: benefits to our society

1.2 Why should we value nature?

Nature provides many, often irreplaceable, benefits to Scotland and its people, but the depletion of natural resources harms our economy and wellbeing. The Scottish Government has an ambition to rebuild natural capital, and a commitment to taking a natural capital approach to better reflect nature in decision making, recognising its value to both the economy and society.

Ecosystem services are the range of benefits to human wellbeing and quality of life that people can derive from natural capital. They are classified into three broad categories:

• Provisioning: products from nature that are sold on the market, such as fish and timber
• Regulating: natural processes that help control climate, water quality, disease, and air purification
• Cultural: non-material benefits of nature which enrich lives such as recreation, health, and tranquillity

To show how irreplaceable ecosystem services are, the report used a substitutability approach to quantify what percentage could theoretically be replaced by engineering solutions and estimates the cost of those replacements.

1.3 The Model

The model is broken down by Standard Industrial Classification (SIC) codes for industry groupings and Regional Economic Partnerships (REPs). There are 4 key points to consider when looking at the data:

1. Renewables Focus: Non-renewables, like oil and gas, are excluded due to their environmental harm. This allows the model to highlight the industries that rely on nature’s ability to regenerate and provide sustainable benefits which are often undervalued or economically invisible.

2. Innovative Methodology: The analysis uses the best method available to merge traditional economic statistics with the non-market value of nature, generating results for the minimum estimate of the value of natural capital.

3. 2019 Data: The analysis uses the Scottish National Accounts (SNA) data from 2019, as it was the latest available data avoiding the COVID-19 impact.

4. Regional Economic Activity: Economic activity for each REP reflects benefits from Scotland’s overall natural capital, not just natural capital within the REP. The focus of the methodology is on where economic activity is, rather than location of natural capital as this data is not available. Regional economic activity estimates are attributed using employment data.

The report found that, across Scotland, only 27% of ecosystem services could be substituted by engineering solutions, reflecting how crucial nature is to our activities. Our often overlooked reliance on natural capital exposes us to significant economic and wellbeing risks, resulting in rising costs and diminishing benefits.

1.4 Summary of results from ‘The Importance of Natural Capital to the Scottish Economy’ report

Natural capital in Scotland supports:

• At minimum around £40 billion of total economic output
• At minimum around 260,000 full-time equivalent jobs

The industries most dependent on natural capital include:

• Agriculture, fishing and aquaculture
• Forestry and wood products
• Forestry and sewerage
• Spirits, wine and beer, malt sectors
• Electricity

Output (£bn) by REP^[2] reliant on Natural Capital:

• Glasgow City: £10.2bn
• Highlands and Islands: £7.9bn
• Edinburgh and South East: £6.3bn
• Tay Cities: £4.9bn
• Aberdeen City and Shire: £4.2bn
• South of Scotland: £2.9bn
• Ayrshire: £2.0bn
• Forth Valley: £1.6bn

Tourism is a key sector of Scotland's economy; the direct impact of nature-based tourism in Scotland is estimated at £1.4 billion per year and 39,000 direct full-time equivalent (FTE) jobs. However, because tourism and outdoor leisure activity is not captured as its own industry in the national accounts, the output and employment effects of nature-based tourism is not highlighted separately in this analysis.

1.5 Case Study: Whisky Industry's Ecosystem Reliance

The whisky industry is important to Scotland both culturally and economically, and it depends on nature in many ways as set out by the three ecosystem service categories:

• Provisioning:
  • Barley grown and harvested in Scotland
  • Peat used for peated whisky production
  • Mountain water from Scottish springs and rivers
• Regulating:
  • Climate regulation prevents droughts
  • Flood protection for distilleries and warehouses
  • Soil quality ensures barley production
• Cultural:
  • Sense of place as whisky is tied to Scottish landscapes
  • Tourism and recreation from distillery tours and tasting experiences
  • Heritage from centuries old traditions and local knowledge