Accounting for ecosystem capital degradation and depreciation

1. ICG 'GDP and beyond' Seminar on 'Evidence and decision making' Brussels, May 10th 2011 Accounting for ecosystem capitaldegradation and depreciation Jean-Louis Weber Special Adviser on Economic-Environmental Accounting European Environment Agency

2. GDP and Beyond Recurrent policy demand (“green GDP”…) • For GDP level aggregates • For general policy making (annual budget discussion  annual updates, fresh data…) • Remediating environmental and social weaknesses of GDP Debate influenced by welfare economics • Micro economics first, individual preferences for utilities • Wealth more important than current income (because wealth secures future welfare) • Wealth to be calculated as net present value of expected future benefits of assets Difficulties for national accounting • National accounts are first of all empirical statistics (which can be interpreted by the economic theory (ies) • Market transactions aggregate conflicting individual preferences (they do the job) • Out of the market (e.g. public good, economic externalities, non-priced well being…), need to simulate markets • Theoretical issues: consistency of prices, NPV time horizon, integration of multiple options (including public good), limits to the aggregation of independent local or sector assessments • Statistical issues: collection and update of micro data on individual preferences (the “benefit transfers” issue)  Wealth calculations still remain incomplete modeling exercise, not accounting

3. Invaluableasset  no monetary value… Wealth is not just about money …but maintaining wealth may have a cost Paid maintenance/ restoration costs Estimated cost of repairs (not yet paid) = Measurement of asset depreciation

4. Estimation of ecosystem capital depreciation: 2 possible ways t1 t2 j j t2 - t1 j Degradation of ecosystem capital (-) j j Assessment of remediation costs € € (+) Estimation of ecosystem capital depreciation… …based on mitigation costs € …based on assets values Account of pressures responsible of degradation Assets j Physical accounts of E-services Physical accounts of E-services Flows Valuation of E-services Valuation of E-services € NPV &(+) NPV &(+) € € (-) Assets € € t2 - t1

5. Ecosystem Capital Consumption or Depreciation • CEC is the monetary estimation of ecosystem depreciation resulting from physical degradation • alike “fixed capital consumption” (UN System of National Accounts) • alike “capital depreciation” in financial corporate accounts (International Financial Reporting Standard) • CEC measures altogether thedepletion of the private or common good (the economic resource, such as timber or managed fish stocks) and the degradation of the public good (such as forest or fisheries) • “To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance” • http://www.ifrs-portal.com/Texte_englisch/Framework/index.htm • Therefore, capital depreciation must be estimated and deducted when calculating profit. This is of highest importance for shareholders (dividends, stocks value…) as well as for the fiscal authority… • However, neither IFRS nor SNA record completeConsumption of Ecosystem Capital: IFRS resourceonly and SNA, nothing… • CEC is an unpaidcost. An unpaidcostis a debt. CEC is the measurement of the increase in ecologicaldebts (to future generations) and shouldberecordedaccordingly.

6. Ecologically sustainable benefits from ecosystem services: the macro-economic approach t1 t2 j j Coefficients of Ecosystem Services (Un)Sustainability j Input-Output Tables€ Ecologically sustainable macro-economic benefit (VA) supported by ES (n) Total effect € € t2 - t1 j Degradation of ecosystem capital (-) Assets j Physical accounts of E-services j Flows Extraction Calculation of total effect on VA of extraction of ES (n) (Source: Jose Acosta, Wuppertal Inst. and EEA-ETCSCP)

7. Main outcome of ecosystem capital accounts • Loss/gain of Ecosystem Capital Potential (degradation/improvement): • Loss of capacity (or potential) to deliver ecosystem services to the economy (resources) and directly to people (public good) • Capacity/potentialintegrates quantitative balances and ecosystem health (vigour, integrity, resilience) • Measurement based on physical accounts of key assets: land, water, biomass/carbon, biodiversity • Multiple scales: from local units (ecosystem units) to regions, rivers basins and countries • Consumption of Ecosystem Capital • Loss of ecosystem capital potential assessed by causes (overharvesting, disposal of residuals, introduction of species, restructuring) • Unitary costs of remediation by analogy to actual cost of works • CEC is part of the final demand at full costs • Ecologically sustainable benefits supported by ecosystem assets/services • Benefits as Value Added of agriculture, forestry, fishery, water management…, • Ecological sustainability = no loss of ecosystem capital potential.

8. Assessment of ecosystem capital accounts: Implicit norms “JRC input to the Interdepartmental Coordination Group (ICG)” by Andrea Saltelli and Angela Pereira The 3 issues highlighted: • The relation between (statistical) evidence – policy (based on statistics), and the issue of the explicit and implicit norms contained by indicators • The capacity of composite/aggregated indicators to represent evidences in a fair way regarding policy making prerogatives • The risk of “extreme reduction”in particular when monetary valuation is used as a method for producing aggregates of the most general nature.

9. Ecosystem capital accounting assumptions: • Ecosystem degradation is measured from multicriteria diagnosis: assumption that maintenance of good state equals maintenance of ecosystem capacity of delivering full range of services (options) • Annual maintenance of ecosystem capital’s potential to deliver services: general target expressed in all accounting standards (SNA, IFRS), good farming practices, insurance standards… • Restoration of historical damages up to stated targets (regulations, plans, Water FD objective of good environmental quality …) • Mitigation/compensation of observed degradation of capital’s potential: consensus in ELD2004, N2000 management (conservation/ restoration/ replacement) , US wetlands mitigation banking system • Payment of demand at full costs (domestic and imported): growing public consensus to pay more for fair trade, organic food… • Recording of non paid costs: not in past flows  ecological debt to be recorded in a special financial accounts; debt should vary according to physical degradation and prices of remediation actions. • Ecologically sustainable benefits vary according to economic activity (+) and ecosystem degradation (-). Their increase is a target… which depends broadly on the reduction of ecosystem degradation

10. Indicators: Resource efficiency : CEC, an additional dimension • Improvement of economy’s environmental performance referred as “eco-efficiency” or “first decoupling”. MFA/ GDP… • Inter-generational optimisation of non-renewable resource use in order to maximise the income flow by means of resource savings and/or substitutions between forms of capital (the “weak sustainability” paradigm). • Improvement of the current ratio: value of commodities/ impacts on ecosystems due to extraction & residuals; combines MFA and Life Cycle Analysis; called “second decoupling” or Environmentally Weighted Material Flows… • Maintenance over time of the living and/or cycling natural capital’s capacity to supply altogether economic resource and life support (clean water, clean air, stable climate, food…). Efficiency = no ecosystem capital degradation Social dimension, wellbeing, consumption patterns: • Final consumption at full costs… • Reflected in the (full) price of imports

11. Statistical soundness • Accounts based on objective and comprehensive data • Radiometry observed by satellites • Derived land cover maps • Official statistics, physical (crops, timber, fish, domestic and imported…) and monetary (maintenance activities, Input-Output Tables and VA by sectors) • Meteo • + sampling (ad hoc or mostly of in situ monitoring data) • + physical modeling • All data documented • No subjective surveys • In line with current developments in statistics (see next slide on Brazilian population census)

12. Evolution of Geo-Technologies Handheld Devices (PDA) Low Cost Images GIS/Web Growing Application at IBGE for both Cartography and Statistics Brazilian Geospatial Statistics

13. Assimilation of statistics into regular grids

14. RM HASSAN - UN The System of Environmental and Economic Accounting (UN 2003) - RANESA Workshop June 12-16, 2005 Maputo UN manual for environmental-economic accounting: SEEA2003Enlargement of SNA1993 (now 2008) Revision  SEEA2012/13 Impacts on ecosystem capacity of delivering services/benefits Volume 1 The SNA satellite accounts for the environment expenditure, taxes, hybrid accounts, physical flows, sub-soil, energy, water land, economic assets depletion Volume 2 Ecosystem approach to accounting Ecosystem stocks and quality, valuation… Negative feedbacks of ecosystem degradation on production and wellbeing

15. First expert meeting on SEEA part 2, ecosystem accounts • Copenhagen 11-13 May • Co-organised by the EEA, UNSD and the World Bank • Discussion of concepts, accounting units and classifications • Correspondance between economic and ecosystem units • Economic assets // Ecosystem assets • Establishments // Land Cover Functional Units • Institutional Units // Socio-Ecological Landscape Units • Commodities // Ecosystem Services • Discussion of valuation options (SNA compatible…) • Outcome presented to the UNCEEA meeting, 15-17 June

16. SNA & SEEA: economic and ecosystem assets

17. Main relations between classifications & accounting units

18. Land Cover Types and derived Land Cover Functional Units Based on FAO LCCS3 mapping sampling

19. Mapping & classification of socio-ecological landscape units (SELU)1- river basins and 2- relief Courtesy Emil D. Ivanov, 2011

20. Mapping & classification of socio-ecological landscape units (SELU) 3- dominant landscape types (urban, intensive agriculture, mosaics, grassland, forests, other natural types and no-dominance) Courtesy Emil D. Ivanov, 2011

21. Application: NECB (net ecosystem carbon balance)here by 1x1 km grid Courtesy Emil D. Ivanov, 2011

22. Classification of socio-ecological landscape units (SELU)

23. Classification of socio-ecological landscape units (SELU)

24. Common International Classification of Ecosystem Services (draft) CICES: Table E.2: Proposed Thematic, Class and Group Structure – source: EEA- Roy Haines-Young

25. Finally, an example of application of the ecosystem accounting methodology for Biomass/carbonNet Ecosystem Carbon Balance by socio-ecological landscape units (SELU), 2000 Source: Emil D. Ivanov/Jean-Louis Weber, ETCSA/EEA. 2011