DOGE should investigate Biden’s natural capital accounts

With an incoming Congress and president at the helm, Republicans are taking aim at problematic Biden-era regulations. In concert with the Department of Government Efficiency (DOGE), Republican lawmakers plan to eliminate many wasteful and unlawful regulations.

One program that demands close scrutiny is the regulatory hydra known as natural capital accounts. These accounts assign monetary values—for investment and other purposes—to currently unpriced environmental amenities.

Natural capital accounts ostensibly resolve a problem. They attempt to draw attention to aspects of the environment that are not priced in markets, and therefore perhaps not considered by investors. However, public benefits from ecosystem services, like clean air and clean water, cannot be readily monetized and captured through traditional recordkeeping techniques. Managers of natural capital accounts ignore this reality.

Consider a radical bid by the New York Stock Exchange (NYSE) to create a new corporate form called, “Natural Asset Companies” (NACs).

NACs are a concept for corporations that exist exclusively to conserve public lands and natural resources. NACs would be listed as companies on a public stock exchange, yet would differ radically from a traditional business. Instead of financial performance, NACs would seek to maximize ecological performance for its natural assets held under management.

Federal departments overseeing public lands would be permitted to lease them onto the NYSE in the form of a tradeable NAC security for investors to purchase.

Had the NAC proposal succeeded, corporate financial performance would be supplanted by “Ecological Performance Reports.”  NACs would have scrapped generally accepted accounting principles standards in favor of the United Nations’ System of Environmental Economic Accounting framework (SEEA).

This is because owners of NACs would have been required to disclose the perceived condition and value of the ecosystem services underlying assets provide using SEEA accounting. Federally managed natural capital accounts similarly adopt a SEEA approach to valuation.

My CEI colleague James Broughel submitted a comment to the SEC on its NACs proposal, exposing the folly of natural capital accounting.

“The SEEA approach is, to put it bluntly, pseudoscience,” according to Broughel’s comment letter. “It is to economics what astrology is to astronomy.” The fundamental error in natural capital accounting is that ecosystems services cannot be retrofitted as investment vehicles, as they are wholly unlike traditional financial instruments.

“Moreover, there is no evidence that the public would desire to invest in a company that produces ‘ecosystem services benefits’ as opposed to traditional financial returns,” Broughel continues.

NACs can only produce financial benefits in a future where the government artificially favors NAC-style assets and incentivizes a market demand for them, such as through subsidies. We’ve seen similar state-level efforts to artificially boost market demand for carbon offsets.  

My own submitted comment on behalf of the Competitive Enterprise Institute exposed NACs for also violating the NYSE’s traditional listing standards, undermining the state incorporation process, and superseding constitutional requirements for chartering new financial enterprises under Congress.

Given these problems, it shouldn’t come as a surprise that the proposal was resoundingly rejected by the public. The NYSE was pressured to withdraw its NAC proposal at the 11^th hour after receiving over 90 percent negative feedback from the thousands of public comments. Soon after, a controversial rulemaking proposal by the US Securities and Exchange Commission (SEC) was also withdrawn in the face of this intense public backlash.  

Proponents of NACs perceive there is a tragedy of the commons, where too many self-interested people are overexploiting limited natural resources such as fisheries, forests, and pastures for personal gain. Yet, this tragedy is worsened, not improved, from ecological central planning like NACs.

As CEI founder Fred L. Smith observed, government programs designed to reduce soil erosion through subsidies inadvertently increase erosion. One reason is because farmers are forced to segment a portion of their land for preservation purposes, while over-cultivating the remaining smaller land.  With this limitation of land development comes less crop yield and a gradual decline in farming productivity over time. The value of the land also diminishes as a result.

The NAC proposal’s restrictions on commercial land usage point in the same direction. If NACs serve as tradable securities, they will lose value when the land underlying the natural asset becomes less productive due to the rule’s strict conservation requirements.

As a result, landowners will confer far less benefits from their properties. Investors, in turn, will be denied financial realization from undeveloped land that can never be developed in the future.

The other perceived problem NACs sought to solve was that many aspects of the environment are not priced. Yet perhaps not all things should be. As we saw with the NAC dilemma, it may not be possible to accurately price natural resources like any commercial product.

The federal government’s current natural capital pilot accounts for land, water, and air emissions aim to resolve this. DOGE should seriously assess whether these accounts are a worthwhile investment of federal dollars given serious concerns over natural capital accounting.

Despite the successful efforts to axe the NAC rule, a regulatory hydra took its place in January 2023, when the Office of Science and Technology Policy, Office of Management and Budget, and the Department of Commerce teamed up to launch natural capital accounts across 27 agencies via its national strategy. The strategy is part of a decades long effort to artificially insert environmental considerations into the US economic decision-making process by 2036.

As Congress probes the looming threat posed by NACs, DOGE should investigate and recommend terminating natural capital accounts. Congress did not provide funds for nor approve of such pseudoscientific accounting methods.

Using DOGE’s findings, members of Congress should consider pursuing the legislative strategy introduced by Rep. John Curtis (R-UT) in H.R.7006 of prohibiting future NACs across all states. The federal government shouldn’t waste taxpayer money on a quixotic attempt to violate generally accepted accounting principles to serve the interests of a tiny handful of activist investors.