Recording changes to the stock of natural resources

1. Recording changes to the stock of natural resources London Group Rome, December 2007 Peter Comisari Australian Bureau of Statistics

2. SEEA 2003 • Characterised by multiple treatment options for some issues. • If SEEA is to become a statistical standard, these ‘options’ must be reconstituted as clear accounting recommendations. • Box 10.4 (SEEA, Ch.10) presents 3 options for recording changes to the stock of environmental assets.

3. Option C1 • Records the consequences of extraction of natural resources in the extended generation of income account leading to a depletion-adjusted operating surplus, but the corresponding increases in resources are shown in the other changes in assets account.

4. Option C2 • Records both the consequences of extraction and additions to natural resources in the extended generation of income account. Additions cover both the natural growth of biological resources and discoveries and reappraisals of subsoil deposits.

5. Option C3 • Is one where there are no entries for extraction and addition to natural resources in the extended generation of income account of those assets which have been reclassified as developed natural assets and which are therefore recorded in the same way as produced assets.

6. Option C3 • Option C3 hinges on the concept of a ‘developed natural asset’ • London Group rejected the concept of a ‘developed natural asset’ at the Johannesburg meeting • Option C3 is removed from further consideration

7. Environmental assets • SEEA identifies the following as environmental assets: • Natural resources (consisting of mineral, energy, soil, water and biological resources); • Land and associated surface water; and • Ecosystems.

8. Environmental assets, continued.. • With the exception of mineral and energy resources, environmental assets are considered to be renewable. • Mineral and energy resources however, are considered to be non-renewable. • This renewable / non-renewable distinction is important in considering the various options.

9. Natural Resources • SEEA Box 10.4 heading refers to ‘environmental assets’, but descriptions of individual options relate to the narrower grouping of ‘natural resources’. • As such, discussion of options generally relates to ‘natural resources’.

10. Environmental assets & the SNA • SEEA and the SNA should reconcile where possible. • Some environmental assets are also economic assets under 1993 SNA, e.g. mineral and energy resources. • Under SNA, natural processes without human involvement are not considered economic production. • Therefore, uncontrolled natural growth of renewables, or additions to non-renewables are not SNA production.

11. SNA cultivated assets • However, natural growth of SNA ‘cultivated assets’ is considered to be economic production. • Growth of ‘cultivated assets’ that are capital in nature (e.g. grape vines), enter the output of the producing unit as own account capital formation. • Growth of ‘cultivated assets’ that are not capital in nature (e.g. grain crops), enter the output of the producing unit as inventories.

12. Are non-renewable natural resources ‘produced assets’? • ABS paper Depletion in the SEEA – Narrowing down the options was presented at the March 2007 London Group meeting. • paper argued that discoveries of mineral and energy resources are not produced, and therefore not part of economic production and income. • Draft SNA93Rev.1 - discoveries are non-produced, and therefore should be recorded in the ‘other changes in volume of assets account’.

13. Are non-renewable natural resources produced assets? • Arguments in favour • Other changes in volume of assets are considered to be unexpected and beyond the control of the units involved. In practice however, new discoveries may be considered predictable. • New discoveries are dependant on dedicated mineral exploration, which clearly is a productive activity.

14. Are non-renewable natural resources produced assets? continued… • Arguments against… • While it may be argued that new discoveries are related to mineral exploration activity, it is difficult to see how mineral exploration assets ‘produce’ new mineral and energy resources. • If mineral exploration ‘produces’ the new mineral and energy resource, the value of discoveries should be the price charged by the exploration enterprise for the exploration.

15. Are non-renewable natural resources produced assets? continued… • Had Option B3 been accepted by LG, mineral and energy resources would be viewed as produced assets. • Concluding that non-renewable natural resources are non-produced assets, presents an apparent accounting asymmetry. • i.e. depletion of non-renewable resources is charged against production. But new appearances of the same non-renewable resource excluded from production.

16. Depletion of renewable natural resources • ABS paper ‘Depletion of renewable environmental resources’ (Bain, 2007). • Proposes net natural growth of renewables be added to resource rent, which in turn is offset by the value of resource depletion (CONC). • Leads to three possible outcomes: (1) Adjusted resource rent is entirely attributed to income; (2) Adjusted resource rent is split between income and depletion; or (3) Adjusted resource rent is entirely attributed to depletion.

17. Growth in renewable natural resources – an addition to output? • As with non-renewables, appearances of renewable natural resources must be reflected on the balance sheet – but how should they get there? • Appearance must take form of an ‘output’ or an ‘other volume change’. • SNA says uncontrolled natural growth of renewables is not economic production. • However, SNA does treat ‘cultivated (renewable) assets’ as economic production.

18. Growth in renewable natural resources – an addition to output? • Much natural growth of renewables not subject to direct ownership and control. • But human intervention directly affects growth / exploitation of renewables. e.g. setting fishing quotas based on sustainable harvest levels. • In this sense, it can be argued that natural growth in renewables is often strongly influenced by human input, even if it is not subject to direct ownership and control.

19. Growth in renewable natural resources – an addition to output? • Cultivated resources such as fish in fish farms exhibit a degree of certainty that the owner will generate output and income from natural growth. • Fish in the open sea do not exhibit the same certainty, although there is often a reasonable expectation that the natural growth will eventually be harvested. • The degree of certainty will undoubtedly vary across different resources and locations.

20. Growth in renewable natural resources – an addition to output? • Treating the growth of renewables as a form of output ensures symmetry of recording resource additions and removals. • However, recording uncontrolled growth of renewables as output presents practical difficulties. • e.g. fish stocks in the open sea are mobile and it’s possible that stock growth within territorial waters of one country may be harvested by another. Why increase the environmentally-adjusted GDP of one nation, if another ultimately harvests the stock?

21. Applying option C1 • Option C1 charges extraction of natural resources against income, giving rise to a depletion-adjusted operating surplus. • It does not consider additions to stocks of natural resources (for example discoveries of mineral deposits) to be a productive activity, instead it records them in the ‘other changes in volume of assets account’. • For non-renewables, this aligns with the London Group position described earlier.

22. Applying option C1 • However under option C1, additions to renewables (e.g. natural growth in forests and fish stocks) are also excluded from output – leading to an inappropriate measure of a depletion-adjusted operating surplus. • By excluding growth of renewables, using option C1 could result in a large depletion adjustment to operating surplus - even where the stock of the renewable asset is increasing.

23. Applying option C2 • Option C2 records both extraction and additions (e.g. natural growth, discoveries and reappraisals) against output and income. • For non-renewables, this implies that reappraisals and discoveries are a productive activity – contrary to the London Group outcome.

24. Applying option C2 • However, option C2 is appropriate for renewables. • In context of SEEA, additions to renewables, such as regrowth of forests and fish stocks, can be considered an addition to output. • Harvest of renewables needs to be offset by any net natural growth in order to derive an appropriate depletion-adjusted operating surplus.

25. Example 1: Fish Stocks – a renewable natural resource

26. Example 1: Fish Stocks – a renewable natural resource • Option C1 would record a depletion value of $30 against income. Natural growth of $20 and natural mortality of $10 would be recorded in the ‘other changes in volume of assets account’. • This implies a depletion adjustment to operating surplus of $30. • unless net natural growth is included in output, this would overstate the depletion impact on operating surplus derived from renewables.

27. Example 1: Fish Stocks – a renewable natural resource • Option C2 would record net natural growth of $10, and a depletion charge of $30. • SEEA depletion-adjusted operating surplus would be $20 lower than SNA operating surplus. • in effect, the net decline in fish stock value is charged against operating surplus.

28. Example 2: Mineral deposits – a non-renewable natural resource

29. Example 2: Mineral deposits – a non-renewable natural resource • Option C1 would record a depletion value of $30 against income, whilst recording discoveries ($5) and reappraisals ($5) in the ‘other changes in volume of assets account’. • This implies a depletion adjustment to operating surplus of $30 • Because there is no ‘production’ of mineral resources, this suggests an appropriate depletion impact on operating surplus derived from renewables.

30. Example 2: Mineral deposits – a non-renewable natural resource • Option C2 would record a depletion charge of $30, and discoveries ($5) and reappraisals ($5) would be added to output and income. • This implies that discoveries and reappraisals are outputs of production.

31. Proposing a fourth option… • Option C4 considers separately the cases of renewable and non-renewable natural resources.

32. Proposing a fourth option… • Option C4 considers separately the cases of renewable and non-renewable natural resources. For non-renewable natural resources the consequences of extraction are recorded in the extended generation of income account leading to a depletion-adjusted operating surplus, but corresponding increases in these resources are shown in the other changes in volume of assets account.

33. Proposing a fourth option… • Option C4 considers separately the cases of renewable and non-renewable natural resources. For renewable natural resources, both the consequences of extraction and net natural growth are recorded in the extended generation of income account leading to a depletion-adjusted operating surplus.

34. Proposing a fourth option… • Option C4 considers separately the cases of renewable and non-renewable natural resources. For non-renewable natural resources the consequences of extraction are recorded in the extended generation of income account leading to a depletion-adjusted operating surplus, but corresponding increases in these resources are shown in the other changes in volume of assets account. For renewable natural resources, both the consequences of extraction and net natural growth are recorded in the extended generation of income account leading to a depletion-adjusted operating surplus.

35. Applying option C4 • Revisiting the earlier examples, option C4 leads to an appropriate outcome in each instance. • In example 1 (Fish Stocks), C4 would add the net natural growth to income, which would in turn be offset by economic depletion (harvest). • In example 2 (Mineral deposits), C4 would charge the economic depletion (extraction) against output and income. The value of discoveries and reappraisals would be recorded in the ‘other changes in volume of assets account’.

36. Conclusions • SEEA proposes three options (C1, C2, C3) for recording changes to the stock of environmental assets. • Option C1 is appropriate for non-renewables, but presents issues in respect of renewables where stock can experience natural growth. • Option C2 accounts for natural growth of renewables, but inappropriately records discoveries of mineral and energy resources as produced assets.

37. Conclusions • Option C3 has been excluded on the basis of previous London Group outcomes which extinguished the concept of a ‘developed natural asset’. • Option C4 overcomes the limitations of the existing options by considering the treatment of renewable and non-renewable natural resources separately.

38. Questions Do members agree that London Group’s earlier rejection of option B3 effectively removes option C3 as a viable option? Do members agree that SEEA should, in principle, view net natural growth in renewable natural resources as part of produced output? Do members agree that option C4 is an appropriate alternative that overcomes the limitations of the existing options?