Seeking Natural Capital Projects: Forest Fires, Haze, and Early-life Exposure in Indonesia

Natural capital will be depleted rapidly and excessively if the long-term, offsite impacts of depletion are ignored. By examining the case of tropical forest burning, we illustrate such myopia: Pursuit of short-term economic gains results in air pollution that causes long-term, irreversible health impacts. We integrate longitudinal data on prenatal exposure to the 1997 Indonesian forest fires with child nutritional outcomes and find that mean exposure to air pollution during the prenatal stage is associated with a half-SD decrease in height-for-age score at age 17, which is robust to several statistical checks. Because adult height is associated with income, this implies a loss of 4% of average monthly wages for approximately one million Indonesian workers born during this period. To put these human capital losses in the context of policy making, we conduct social cost-benefit analyses of oil palm plantations under different scenarios for clearing land and controlling fires. We find that clearing for oil palm plantations using mechanical methods generates higher social net benefits compared with clearing using fires. Oil palm producers, however, would be unwilling to bear the higher private costs of mechanical clearing. Therefore, we need more effective fire bans, fire suppression, and moratoriums on oil palm in Indonesia to protect natural and human capital, and increase social welfare.