Valuation for Accounting Seminar DEFRA-ONS

1. Valuation for Accounting SeminarDEFRA-ONS Glenn-Marie Lange The World Bank 11 November, 2013

2. The 4 Papers • Recognising and managing uncertainty in national and environmental accounting (Michael Vardon) • Data: how we establish confidence in the accounts • Selecting discount rates for natural capital accounting (Jawed Khan and Peter Greene) • The perennial question in dealing with capital • Towards a consistent approach for ecosystem accounting (Bram Edens and Lars Hein) • How ecosystem accounts are actually integrated in an SNA-consistent framework. Some people here may not be familiar with the way SNA actually organizes and presents data…. • Unnatural capital accounting (Colin Mayer) • Discussion of the conceptual approach to valuing natural capital

3. 1. Data Quality • Environmental accounts held to high standards, perhaps higher standards than SNA, but no formal processes yet established • Much can be learned from the well-established processes for assessing and ensuring data quality in the SNA • Basic principles • Relevance • Accuracy • Timeliness • Accessibility • Interpretability • Coherence Also, transparency and independence

4. Lessons learned for assuring data quality in the environmental & experimental ecosystem accounts? • ABS builds on well established practices for data quality in the SNA—where were these practices modified for the SEEA-CF or were different challenges faced, especially wrt to subsoil assets or natural forest assets, for which ABS has 20 (?) years’ experience. • Is there anything inherently different with ecosystem accounts that makes the data assessment more challenging? • What have been the reactions to the ABS experimental ecosystem accounts and how the update of the Queensland accounts has been informed by (any) feedback on data quality?

5. 2. Choosing the Discount Rate Lots of discussion by economists (and others) No consensus Asks for advice on 3 alternatives, base don the purpose or objective of the discounting • Social discount rate if “…the purpose is sustainability of natural capital and ecosystems…” Possibly at 3.5% or some other rate • Market (private) discount rate if “…the purpose is to extend the national accounts…” i.e., to be consistent with SNA, it should adhere to decisions made by individuals and businesses. But whichmarket rate for which asset should be used? Guidance in the SNA, SEEA is not clear on exactly what this should be • Uniform discount rate using the Treasury Green book high social discount rate of 3.5%.

6. 3. Approaches to accounting for ecosystems Review of past environmental accounting experiences Two major components: • if one were to value ecosystem services, how would they be integrated in the accounting framework • how should ecosystems be valued, section called “Defining and Measuring Degradation in Ecosystem Accounts”

7. Part 1. Accounting for ecosystems: Key challenges Importance of avoiding double-counting of non-market ES Two alternative approaches to recording stocks & flows • Ecosystem as another asset contributing to • Ecosystem as an independent producer, a new sector—quite a novel approach • Both approaches are valid—what I would challenge them to do is to look at the alternative approaches through the lens of a user. Challenge to the authors: the use of accounts should guide development • SNA is organized well to support multi-sectoral analysis/modeling that can trace economy-wide linkages and impacts of changes (SUT, IO, SAM) • What are the implications for policy use/mgmt/analytical work of the alternative approaches? What questions could be answered, or would be more difficult to answer using one or the other of these approaches?

8. Part 2. Valuation of degradation Why only degradation, not valuation more broadly? 3 issues addressed • Physical measures of degradation • Economic measures of degradation • Allocating degradation to different sectors (since the agency causing degradation may not be the same as the one suffering the loss)

9. Economic measures of degradation Reviews arguments over the past 25+ years for • Restoration costs or • Change in (value of) capacity to supply ecosystem services SNA principle of valuing asset degradation is consistent with change in the NPV of ecosystem services Further discussion of valuation approaches consistent with SNA….

10. 4th paper—Conceptual approaches to valuing Natural Capital • Extending the national accounts • Welfare-based comprehensive/inclusive wealth accounting • Corporate natural capital accounting

11. Extending the National Accounts What are we trying to measure • “sunlight” How to measure • Substitution among assets and Ethical principles—maintain natural capital intact • Valuation principles for degradation/depletion • Restoration/replacement costs vs • Value of benefits

12. Restoration/replacement cost Under what conditions would the replacement/restoration costs provide a reasonable estimate/lower bound on value? • The same service is provided • It is the least cost option • There is strong evidence that the value of this (substitute) service exceeds the cost of producing the service, that is that MC<MB