Integrating Soil Natural Capital Into Production Frontiers of Ecosystem Services in Agriculture

ABSTRACT Natural capital is a key element in the provision of soil ecosystem services (ES). However, most economic analyses of production lack an explicit integration of natural capital and its components. We develop a novel empirical approach that integrates soil natural capital into a multi‐output production model using a distance function framework. By treating natural capital as a latent variable derived from biophysical soil indicators, we bridge the gap between stock‐based and service‐based approaches to ecosystem valuation, providing joint estimates of technical efficiency and ES provision in agriculture. Our empirical application uses data from a sample of farmers and detailed soil observations collected by the Observatoire Pérenne de l'Environnement (ANDRA, Grand‐Est Region, France). We focus on two key ES provided by agricultural soils: biomass provision and climate regulation. Estimation results show that soil natural capital is a highly significant input in the distance function, and that omitting it leads to an underestimation of technical efficiency. We also find evidence of a trade‐off between biomass production and climate regulation services.