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Recording Ecological Debts and Assets in National Accounts

This article explores the possibilities offered by the development of ecosystem capital accounts in recording ecological debts and assets in national accounts. It discusses historical green accounting projects, recent initiatives, and the need for improved economic indicators. It also highlights the importance of accounting for ecosystem capital degradation and depreciation in order to calculate the real national income.

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Recording Ecological Debts and Assets in National Accounts

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  1. Horizon 2020 Capacity Building/Mediterranean Environment Programme “Green Banking in the Mediterranean” November 22nd -23rd 2011, Barcelona (Spain) Recording Ecological Debts and Assets in the National Accounts: Possibilities Offered by the Development ofEcosystem Capital Accounts Jean-Louis Weber Special Adviser on Economic-Environmental Accounting European Environment Agency jean-louis.weber@eea.europa.eu

  2. National Accounts & the Environment:Recurrent demands for improved economic indicators and aggregates • Historical pioneer “green accounting” projects: Norway, Canada, France, Philippines, Indonesia, the Netherlands, Spain… • Rio1992, Agenda 21 • UN SEEA1993 to “adjust” the UN System of National Accounts. SEEA revised in 2003 • New SEEA revision by2012/13, including now a special volume on ecosystem accounts and valuation • Recent initiatives: • Beyond GDP Conference 2008 • Potsdam 2008 G8+5 initiative and TEEB • Stiglitz/ Sen/ Fitoussi report on the measurement of economic performance 2009 • New CBD Aishi-Nagoya Strategy 2010: demand for the inclusion of biodiversity and ecosystem value into national accounts • World Bank’s new Global Partnership for “Green Accounting” and Ecosystem Valuation • References to environmental accounts for measuring progress in Green Economy, Green Growth, Resource Efficiency… • Initiative(s) in preparation for Rio+20 • In Europe, new Regulation on Environmental Accounts: Eurostat (the economy-environment interface) and the EEA (ecosystem capital accounts)

  3. UN manual for environmental-economic accounting: SEEA2003Enlargement of the System of National Accounts (SNA) RM HASSAN - UN The System of Environmental and Economic Accounting (UN 2003) - RANESA Workshop June 12-16, 2005 Maputo 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 capital accounts Ecosystem stocks and quality, ecosystem services, benefits and maintenance costs… Negative feedbacks of ecosystem degradation on production and wellbeing

  4. Accounting for the performance(s) of 2 co-evolving systems: resources, productivity and health Economic system Economy performance Economic growth Trade Value-added, income, profit… Consumption Investment Wealth (non-financial and financial assets) Economic health (net savings, assets and debt quality, accountability, prices, well-being, knowledge) Use of natural resources Products & economic assets Fossil energy & materials Biomass/carbon Water Land systemic services Ecosystem Ecosystem potential (capacity to deliver services) Ecosystem productivity Flows Accumulation Stocks Ecosystem health (biodiversity, integrity, resilience, interdependence) Capital maintenance (to remediate degradation)

  5. Maintaining & restoring capital • Maintaining capital is maintaining its wealth, productivity, capability, health, options… • Capital depreciation (business accounts) or consumption (national accounts) is an estimation of the money to set aside in order to maintain or replace capital. • Recording depreciation is a major concern of accounting standards, the issue being fairness of measurement of income, of actual price of commodities, and of economic performance. • Calculation of company’s net income or profit must be net of capital depreciation (IFRS) • “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 • In National Accounts, calculation of net domestic product, net national income and net savings is net of consumption of fixed capital (SNA2008).

  6. Natural resources are a capital: depreciation should be calculated • IFRS and SNA recommend recording depletion of economic natural assets (such as oil, coal, ores, timber or fish stocks) which owned and managed for profit. • IFRS adjusts net income calculation from natural resource depletion (depreciation). • The SNA2008 doesn't adjust Net National Income from depletion (because the calculation is optional, measurement issues). • Degradation of ecosystem functions is not recorded either by IFRS or SNA. Basic ecological functions are simply ignored although they supply services to people and to the economy itself. • Depreciationor Consumption of Ecosystem Capital (CEC) isan unpaidcost. An unpaidcostis a debt. CEC is the measurement of the increase in ecologicaldebts (to future generations) and shouldberecordedaccordingly. Accounting for ecosystem capital degradation and depreciation aims at providing policy makers with measurements necessary to calculate the real national income, the true prices of the commodities that we use and when this price is not paid, to record the amount of debts to nature which are in reality debts to future generations.

  7. The fast track implementation of ecosystem capital accounts in Europe • Based on: • European experience • Current development of ecosystem accounts in the UN SEEA revision • Objectives: • Meet the policy demand • Accounts for 27 EU countries • Best use of geographical information when possible, e.g. 1 km x 1km grid • Use of official statistics for socio-economic data • Annual accounts 2000-2010 • Physical accounts first, by 2012, followed by monetary accounts  make it relevant but simple

  8. The narrative behind Ecosystem Capital Accounts: 1- Ecosystems deliver altogether multiple services Source: Gilbert Long, 1972 A propos du diagnostic écologique appliqué au milieu de vie de l'homme. Options Méditerranéennes, 13 , CHIEAM, Montpellier, Juin 1972

  9. Non-basic eco-product Surplus accessible for harvest/abstraction Basic eco-product Necessary for ecosystem reproduction (conservation of ecosystem health, integrity, functions & services) The narrative behind Ecosystem Capital Accounts: 2- Only a surplus is accessible for human use Ecoproduct (of cycling and reproductive systems/ capital) are produced by means of other ecoproducts. The ecosystem production function includes a surplus ecoproduct that can be used by the economy. (from Anthony Friend 2004) Economy Sources: Kling/U Michigan_2005 & Friend/ISEE_2004

  10. Non-basic eco-product Basic eco-product The narrative behind Ecosystem Capital Accounts: 2- Only a surplus is accessible for human use Challenge = maximise yields while maintaining natural functions and biodiversity Possible compensation = artificial input (irrigation, energy, fertilizers, infrastructures…) Surplus accessible for harvest/abstraction Economy Necessary for ecosystem reproduction (conservation of ecosystem health, integrity, functions & services) Non-sustainable harvest/abstraction Sources: Kling/U Michigan_2005 & Friend/ISEE_2004

  11. About natural resource: availability vs. accessibility • Available resource: the total resource (actual stocks and flows) which can be used in principle (but should to be shared between economy and nature…). • Accessible resource: the surplus (actual stocks and flows) which can be used considering 1) physical constraints (timeliness and location, cyclical risks, bio-chemical quality) & 2) the amount to be left to nature for ecosystem reproduction. N.B.:When returned to the ecosystem (leftovers in agriculture or forestry, water returns…) the resource destroyed or modified during the production process becomes accessible again. Ecosystem capital accounts refer to accessible resource and intensity of use.

  12. Accessible resource: carbon/biomass, freshwater, systemic services Accessible resource = Stocks (soil, forests, aquifers, reservoirs, landscapes…) Minus inaccessible stocks Physical inaccessibility (deep aquifers …) Inappropriate quality (salted or polluted water, non arable land…) Plus flows (NPP, effective rainfall…) Minus inaccessible flows Physical inaccessibility (most of flood water, distance, non transportable resource, timeliness issues, water evaporated by irrigation…) Inappropriate quality (polluted water) Maintenance of stocks (soil carbon, forests stock of timber, aquifer level, dilution of pollutants in rivers…) Plus/minus adjustment for stress, risk

  13. Example of accessible water adjustment: occurrence of soil water stressNumber of days when no water was available for plants in 2001, 1 km^2 grid Source: Blaz Kurnik, EEA, 2011

  14. The narrative behind Ecosystem Capital Accounts: 3 – As a capital, ecosystems produce altogether 3 broad types of services between which there is no compensation or tradeoff: biomass/carbon AND freshwater AND systemic services. Ecosystem capital potential (& degradation) can be measured by combining measurements of these 3 broad services (accessible resources). 1 - Accessible carbon surplus Measurement with a new physical currency: EPUE for Ecosystem Potential Unit-Equivalent 3 - Accessible ecosystem systemic services Total Ecosystem Capital Potential & Ecosystem Capital Degradation 2 - Accessible water surplus

  15. The narrative behind Ecosystem Capital Accounts: 4 – The simplified ecosystem capital accounting circuit GDP, National Income, Final Consumption at Purchasers’ price • Adjusted macro economic aggregates •  Adjusted capital consumption • Final demand at full price • Adjusted net domestic product (or net national income) (Unpaid) costs needed to remediate ecosystem degradation (€) Ecosystem degraded by over-use (j) j ES based economic benefits (€) Healthy ecosystem deliver services to the economy & to the public well-being j ES based economic benefits (€) j ES based economic benefits (€) Economic system (including natural assets & ecosystem services Ecosystem assets/capital (j) (jand€)

  16. 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 by issues € € Estimation of ecosystem capital depreciation… & addition …based on remediation costs € …based on assets values j Assets j Physical accounts of E-services Account of pressures responsible of degradation Physical accounts of E-services Calculation of unit costs Flows Valuation of E-services Valuation of E-services € NPV & addition NPV & addition € € (-) Assets € € t2 - t1

  17. From theory to statistics and accounts Theoretical background (very incomplete…): • Georgescu-Roegen (The Entropy Law and the Economic Process (1971), • Odum (emergy) • Resource depletion: Hotelling, El Serafy • System approach : Joel de Rosnay (The macroscope, 1975) • Dissipative structures: Prigogine (The New Alliance, 1986) • L'économique et le vivant: René Passet (1977) • Natural resource economy: Naredo (1987) • Urban metabolism: Duvignaud • Global biotic regulation: Gorshkov • Co-evolving systems: Norgaard • Ecosystem services: Long (1972), Costanza and De Groot, Millennium Ecosystem Assessment (2003) • Interaction between scales: Hollin (“panarchy”) • Landscape ecology (UK) • Ecosystem units: socio-ecological systems (Gallopin, Carpenter, Rockström, MA2003…) • Ecosystem health (D. J. Rapport), resilience (the Resilience Alliance) • from economic-ecological theory to statistical practice and accounts : statistical units and classifications

  18. Main relations between classifications & statistical units in the revised SEEA (from UNCEEA 2009 – EEA & FAO)

  19. SNA & SEEA: assets “shared” by the economic and the ecosystem Adapted from Ivo Havinga and Daniel Clarke, 2011

  20. Common International Classification of Ecosystem Services (draft EEA, UNEP & UNSD) CICES: Table E.2: Proposed Thematic, Class and Group Structure – source: EEA & Roy Haines-Young, Presented at UNCEEA 2010

  21. Land cover classification based on FAO LCCS3Land Cover Types (SEEA vol. 1) and derived Land Cover Functional Units (SEEA vol.2) zoning provisional Source: FAO (DiGregorio and Ramaschielo) & EEA (Steenmans & Weber) 2011 sampling, questionnaires

  22. Ecosystem accounting and statistical units (continued) SNA’s statistical units don’t record ecosystem degradation  need for other units… Theoretical units vs. observation units (proxies for collecting data) • Theoretical units: characteristic systems into which natural and socioeconomic elements interact to transform ecosystem functions into goods and services: • Functional units producing elementary services • “Socio-ecological systems”, “socio ecosystems” or “Socio-ecological production landscapes” (the Japanese satoyama and satoumi)  • Observation units: • For which we can collect data in a systematic way • Mostly surface units: “geo-systems”, land cover units, functional administrative units, ownership units… Japan Satoyama Satoumi Assessment, 2010. Satoyama-Satoumi Ecosystems and Human Well-being: Socio-ecological Production Landscapes of Japan – Summary for Decision Makers. United Nations University, Tokyo, Japan.

  23. & Socio-ecologicallandscapeunits (SELU) Land coverfunctionalunits

  24. ZOOM: SELU in Central Europe

  25. ZOOM: Land cover functional units by SELU

  26. Total ecosystem capital potential & change t0 t1 Degradation Improvement

  27. Ecosystem physical degradation, sustainable benefits from ecosystem services and non-paid maintenance costs Consumption of ecosystem capital (non-paid costs) Degradation Mean restoration prices Improvement Economic statistics & national accounts Sustainable use coefficients Sustainable benefits (income from key ecosystem services) Sustainable benefits (Value Added from key ecosystem services)

  28. Ecosystem-Economy integrated accounts SEEA Volume 2 SEEA Volume 1

  29. The draft framework Basic accounts Synthesis tables in physical units Monetary accounts

  30. The basic accounts by ecosystem units by economic sectors

  31. The synthesis tables by ecosystem units by economic sectors

  32. The monetary accounts by ecosystem units by economic sectors

  33. Key Indicators and Aggregates • Net Ecosystem Accessible Carbon Surplus (Use/NEACS reflects intensity of use; it integrates resource efficiency and ecosystem) • Net Ecosystem Accessible Fresh Water Surplus • Green Accessible Landscape Infrastructure (and demand of services in the Neighbourhood of human settlement (GINES)) • Net Total Ecosystem Capital Potential and Ecosystem Capital Degradation (integrates acessible carbon, water and landscape and mean biodiversity rating  basis to calculate Consumption of Ecosystem Capital in €) • Final Consumption at Full Price (the full cost of commodities in € integrates purchasers’ prices and non-paid domestic consumption of ecosystem capital (CEC), and relates to unfair trade and ecological debts) • Imports at Full Price (total of imports at CIF price and Ecosystem capital depreciation virtually embedded into imports) • CEC Adjusted Net Domestic Product (or/and Net National Income, or/and Net Savings) (a more complete adjustment of Net Product, Net Income or Net Savings includes in addition subsoil resource depletion).

  34. About ecological debts… Bertrand de Jouvenel 1968: “Because National Accounts are based on financial transactions, they account nothing for Nature, to which we don’t owe anything in terms of payments but to which we owe everything in terms of livelihood.” • CEC is a new debt to national future generations • CEC can be embedded into imports and exports  there are external debts • Other ecological debts don’t result from CEC but from collectively stated targets; they correspond to recovery of historical or degradation demand for improvements; they are stated in legal documents (national law or programme, international conventions with quantified objectives…) which are voted by parliaments. • Physical Debts and Monetary Debts are recorded separately; the repayment of the monetary debt doesn’t not necessarily extinguishes the physical debt is CEC has been underestimated; oppositely, unexpected natural processes or changes in land use may lead to a “cheaper” recovery cost. • Financial ecosystem assets, physical and monetary units exist as well. They are the are the counterpart of: • The non-financial natural assets in the SNA sense (owned and managed for profit); they should never be consolidated with debts or rights related to non-market values • Rights for compensation in case of exported CEC; such right could be claimed in counterpart of actual restoration only; • Rights related to verified improvements (by an international organisation) • International allocation of rights regarding global ecosystem issues and national potentilas

  35. About ecological debts… other consolidation rules for ecological debts: • Physical debts are not directly transferable; e.g. acquisition of debts from foreign country (embedded in imports) cannot be extinguished by ecosystem improvement in the buyer country; • When created by physical debts, monetary debts are not mechanically extinguished by repayment but by the extinction (remediation) of the physical debt itself; • Because physical ecosystem capital assets are not valued, monetary debts cannot be consolidated with monetary ecosystem non-financial assets; • Monetary debts can be consolidated with financial ecosystem capital assets in the context of international mitigation systems if they include initial allocations of (non transferable) ecosystem capital rights and/or recording systems for ecosystem improvement and consolidation rules. • The physical counterparts (units: Ecosystem Potential Unit-Equivalents) of approved allocations and improvement s are not transferable. However they can be leased to ecological debtors (countries, business…)

  36. Thank you! Jean-Louis Weber jean-louis.weber@eea.europa.eu jlweber45@gmail.com

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