National Ecosystem Services Classification System (NESCS) Part 1: Conceptual Framework and Basic Design

National Ecosystem Services Classification System (NESCS) Part 1: Conceptual Framework and Basic Design Paramita Sinha and George Van Houtven EPA, September 17th 2013

Roadmap NESCS (PART 1) • Introduction to NESCS – Objectives and Background • Conceptual Framework NESCS (PART 2) • NESCS- Classification Structure • NESCS Supply Side (NESCS-S) • NESCS-Demand Side (NESCS-D) • Relationship between NESCS-S and NESCS-D: Crosswalk NESCS (PART 3) • Illustrative Applications • Conclusions and Future Research

NESCS – Objectives • Provide a classification framework that will aid in analyzing the human welfare impacts of policy-induced changes in ecosystems • Primarily to support “marginal” analysis, such as cost-benefit analysis and distributional analysis • Not primary focus but… also expected to provide useful framework for conducting environmental or “green” GDP accounting

NESCS – Objectives (Continued) • Analyzing the human welfare impacts (benefits) of an environmental policy typically entails 3 main steps (USEPA, 2010): • identify benefit categories potentially affected • quantify significant endpoints, to the extent possible • estimate the values of (monetize) these effects, as feasible and appropriate • Focus of NESCS: • Provide a classification system that will primarily support the identification step but, in the process, also facilitate the quantification and valuation steps

Background – What is a Classification System? • Definition: • “the ordering or arrangement of objects into groups or sets on the basis of their relationships” (Sokal, 1974) • Key characteristics of a “good” classification system (UN, 1999): includes categories that are • exhaustive and mutually exclusive • comparable to other international standard classifications • stable: not changed too frequently • well described and backed up by explanatory notes, coding indexes, coders, etc • well balanced: not too many or too few categories

Existing Approaches to Define/Classify Ecosystem Services • Since seminal work by Daily et al. (1997), a large variety of ecosystem service definitions and classification approaches have been proposed, including: • Millennium Ecosystem Assessment (MEA) (2005) • Boyd and Banzhaf (2007) • Common International Classification of Ecosystem Services (CICES); Haines-Young and Potschin (2012) • Federal Office for the Environment (FOEN), Switzerland; Staub et al. (2011) • The Economics of Ecosystems and Biodiversity (TEEB); de Groot et al. (2010) • UK National Ecosystem Assessment (NEA); Bateman et al. (2010)

Key Similarities and Differences Across Systems • General agreement that human well-being is supported by the existence, processes, and outputs of ecosystems • Ecosystem services arise from this supporting role • Differences in policy objectives, specific definitions of ecosystems services, and criteria for grouping • Disagreement on where ecosystem services occur along continuum between ecosystems and human welfare • What is the difference between ecosystem processes/functions and ecosystem services? • What is the difference between ecosystem services and benefits?

Guidelines for Developing NESCS • Develop NESCS by applying, adapting, and combining the principles underlying • existing economic classification and accounting systems for market goods and services • the concept of final ecosystem services described in Boyd and Banzhaf (2007) and applied in FEGS-CS • Develop a classification system that • comprehensively and uniquely (without duplication) identifies distinct categories of final ecosystem services • supports analysis of how policy-related changes in ecosystems affect human well-being

Two Main Components of NESCS Approach • Conceptual framework describes the main pathways through which ecosystems impact human welfare • Represented by a flow diagram showing linkages between natural systems (ecosystems) and human (market production and household) systems • Classification system identifies final ecosystem service flow categories by defining and combining 4 main classification groups • Environmental classes • Ecosystem end-product categories • Direct human use categories • Direct human user categories

Building Blocks for NESCS Conceptual Approach • Draws on methods used by the Bureau of Economic Analysis (BEA) and other federal agencies to classify goods and services exchanged in the market economy • North American Industry Classification System (NAICS) • SUPPLY SIDE perspective: How are ECONOMIC goods and services produced? Who produces them? • North American Product Classification System (NAPCS) • DEMAND SIDE perspective: How are ECONOMIC goods and services used? Who uses them? • NAICS/NAPCS were primarily designed to support the National Income and Product Accounts (NIPA) • define the value and composition of output in the U.S. economy, including gross domestic product (GDP)

2012 NAICS 2-Digit Sector Codes and Descriptions 11 Agriculture, Forestry, Fishing and Hunting 21 Mining, Quarrying, and Oil and Gas Extraction 22 Utilities 23 Construction 31-33 Manufacturing 42 Wholesale Trade 44-45 Retail Trade 48-49 Transportation and Warehousing 51 Information 52 Finance and Insurance 53 Real Estate and Rental and Leasing 54 Professional, Scientific, and Technical Services 55 Management of Companies and Enterprises 56 Administrative and Support and Waste Management and Remediation Services 61 Educational Services 62 Health Care and Social Assistance 71 Arts, Entertainment, and Recreation 72 Accommodation and Food Services 81 Other Services (except Public Administration) 92 Public Administration

Selected NAPCS Canada 2012 3-Digit Codes and Groups 111 Live animals 112 Wheat 121 Fish, shellfish and other fishery products 131 Logs, pulpwood and other forestry products 142 Natural gas 161 Potash 172 Meat products 193 Bottled water, carbonated soft drinks, other beverages, and ice 231 Clothing, footwear and accessories 271 Basic chemicals 371 Electronic and electrical parts 412 Medium and heavy trucks, buses and other motor vehicles 511 Transportation of commodities by pipeline 541 Warehousing and storage services 581 Rental and leasing (except rental of real estate) 712 Advertising, public relations, and related services 831 Sport and live performance services 871 Public administration services

NAICS-NAPCS Comparison: Example 1 NAICS Code Description 22111 Electric Power Generation 221111 Hydroelectric Power Generation 221112 Fossil Fuel Electric Power Generation 221113 Nuclear Electric Power Generation 221114 Solar Electric Power Generation 221115 Wind Electric Power Generation 221116 Geothermal Electric Power Generation 221117 Biomass Electric Power Generation 221118 Other Electric Power Generation NAPCS Code Group/Detail 145 Electricity 14511 Electricity 451111 Electricity

NAICS-NAPCS Comparison: Example 2 NAICS Code Description 32518 Other Basic Inorganic Chemical Manufacturing 325180 Other Basic Inorganic Chemical Manufacturing NAPCS Code Group/Detail 27112 Other Basic Inorganic Chemicals 271121 Sulphuric acid 271122 Chlorine 271123 Sodium hydroxide 271124 Inorganic potassium and sodium compounds 271125 Carbon black 271126 Chemical catalytic preparations 271127 Nuclear fuel 271128 Other

Definition of “Services” for Economic Accounts • Services are difficult to define • Economic Classification Policy Committee (1993) notes “[t]here does not exist an internationally-agreed official definition of services,……” • U.S. Census Bureau adopted the following definition: • “A service is a change in the condition of a person or of a good belonging to some economic entity, brought about as a result of activity of some other economic entity….” (Hill,1977) • Features of services that distinguish them from “goods” include that they are typically • Intangible • Non-storable • Inseparable from provider and consumer

Conceptual Framework for NAICS/NAPCS and Economic Goods and Services Supply-side Demand-side Physical Capital and Labor Economic Production Function Household Utility Function HUMAN WELL-BEING capital and labor services economic goods and services/ products K, L Q(K, L) U(Y) W K, L Y NAICS classification NAPCS classification

Distinguishing Between Intermediate and Final Products Supply-side Supply- and Demand-side Overlap Demand-side Final Production Function Physical Capital and Labor Household Utility Function Intermediate Production Function HUMAN WELL-BEING capital and labor services Intermediate Economic Goods & Services /Products FinalEconomic Goods & Services / Products K, L QI(K, L) K, L QF(K, L, YI) U(YF) W YI YF NAICS classification NAPCS classification

Expanded Conceptual Framework for NESCS Economic Goods & Service Supply-side NAICS NAPCS Economic Goods & Service Demand-side Final Economic Production Function Intermediate Economic Production Function Ecosystem Service Demand Side Household Utility Function Physical Capital and Labor HUMAN WELL-BEING capital and labor services Intermediate Economic Goods & Services /Products FinalEconomic Goods & Services / Products NESCS-D FinalEcosystem Service Flows NESCS-S Ecosystem Service Supply Side Ecological Production Function Natural Capital Ecosystem End-Products N QE(N) E

Expanded Framework In Relation to FEGS Economic Good & Service Supply-side NAICS NAPCS Economic Good & Service Demand-side Economic Production Final Economic Production Function Intermediate Economic Production Function Household Utility Function Physical Capital and Labor HUMAN WELL-BEING capital and labor services Intermediate Economic Goods & Services /Products FinalEconomic Goods & Services / Products NESCS-D Flows of FEGS to beneficiaries Flows of FEGS to beneficiaries Flows of FEGS to beneficiaries NESCS-S Nature’s Production Ecological Production Function Natural Capital Final Ecosystem Goods & Services (FEGS) Stocks

Example Illustrating the Conceptual Framework Economic Supply-side Economic Demand-side Intermed. Economic Production Function CORN PRODUCTION Final Economic Production Function CORN FLAKE PRODUCTION Household Utility Function HUMAN WELL-BEING Physical Capital and Labor Ecosystem Service Demand Side Final Product Corn Flake Sales Intermediate Product Bulk Corn Sales capital and labor services Water Supporting Food Processing Water Supporting Human Life & Health Water Supporting Plant Cultivation Ecosystem Service Supply Side Ecological Production Function GROUNDWATER RECHARGE End-Product/ FEGS Stock WATER in aquifer Natural Capital WETLAND

NESCS Definitions • Ecosystem end-products are the components of nature that are either directly used by humans to produce goods and services or directly enjoyed or used to yield human well-being. • They are usually (but not always) represented as stocks of end-products. • Final ecosystem services flows are the contributions that the end-products of nature provide (1) directly to human production processes or (2) directly to households and human well-being. • They are represented by service flows between ecosystem end-products and direct human uses.

Economic vs. Ecosystem Goods and Services • Market vs. Non-market • Ecosystem services are typically not sold in markets, so there are no transactions or prices • Private vs. Public Goods • Ecosystem services often have “non-rival” public good characteristics – i.e., enjoyment by one user does not diminish simultaneous enjoyment by other users • “Final “ has a different but related meaning • Final economic goods and services are sold to the end user – i.e., flow from producers to households/consumers • Final ecosystem service flows occur at the “point of direct hand-off” between natural systems and human systems (producers and households)

Economic vs. Ecosystem Goods and Services (cont’d) • Complementarities complicate the classification of ecosystem services • Complements in Production • A joint production process simultaneously converts a common set of inputs into multiple different outputs • Individual ecosystems often simultaneously provide a wide variety of end-products and services • Complements in Consumption • Goods or services that are typically consumed together and increase each other’s value to consumers • Individuals often value a bundle of ecological attributes more than the sum of individual attributes (e.g., landscapes) • More difficult to identify complementarities with ecosystem services due to lack of transaction/price data

Caveats/Notes • Feedback effects from human to natural systems • By design, the NESCS conceptual framework does not include dynamic or other feedback effects • Feedbacks and dynamics are often important for quantifying and valuing ecological benefits, but they are not expected to alter how we classify the ecosystem service flows from nature to humans • Natural vs. managed ecosystems: • NESCS conceptual framework draws a bright line between natural and human systems, but there are “grey” areas. • e.g., planted forests, national parks

END OF NESCS – Part 1

National Ecosystem Services Classification System (NESCS) Part 2: Classification Structure Paramita Sinha and George Van Houtven EPA, September 17th 2013

NESCS: Two Main Components In what ways does the NESCS framework and classification serve its primary purpose of supporting policy analysis? Conceptual framework: Provides a way to systematically link ecological systems that produce ecosystem services and human systems that directly use these services (i.e. market production systems and households). This was the focus of Part 1. Classification system: The objective is to define mutually exclusive and exhaustive categories for linking and ecosystem outcomes to direct human uses (i.e. identifying flows of ecosystem services). This will be the focus of Part 2.

Supply- and Demand-Side Classification of Economic and Ecosystem Goods and Services

Proposed 4 – Group NESCS Structure Currently working on refining Sub –categories, especially for direct uses.

Implementing NESCS Objective (Step 1) • Focus of NESCS: “Identifying” direct contributions of ecosystems to human welfare such that it will support quantification and valuation • How does the NESCS structure do this? Step1: Identify the point of handoff from the ecosystem to human beings - NESCS-S • Done through defining ecological end-products. • What are the biophysical outcomes of nature that humans directly use and care about?

NESCS 4 – Group Structure: Supply Side

NESCS 4 – Group Structure: Environmental Class

NESCS Levels 1 and 1a: Environmental Classes and Sub-Classes (from FEGS –CS) Source: Appendix, FEGS-CS (v1.8)

NESCS-S: Review of Existing Classification Systems for Environmental Classes • Reviewed existing classifications for each of the FEGS-CS Environmental Classes (Aquatic/Terrestrial/Atmosphere) or Sub-Classes (e.g. Wetlands, Rivers and Streams, Near Coastal Marine, etc) • Found that there were numerous classification systems built for different purposes (list of references will be provided in the NESCS report) • Some applied purely biophysical criteria and some applied human use-based criteria for defining categories and sub-categories • At this point, not productive to include more detailed levels of environmental classes

NESCS 4 – Group Structure: End –products

End –products: Distinguish Between Final vs. Intermediate • End-products: Biophysical outcomes of nature that humans directly use and care about • Defines the point of hand-off between ecosystems and human systems • “Final” vs. “Intermediate”: End-products are specific to the context. • E.g. water is an end-product when we consider drinking water, but for recreational uses, fish is the relevant end-product. • Clean water is important for fish abundance, but this is intermediate. • Thus, what is “final” is specific to the ways in they are used by human beings : NESCS –D

Starting Point for NESCS Level 2 : List of 21 FEGS Identified in FEGS-CS • Great – End-products already identified in FEGS-CS! • NESCS attempts to put a bit more structure on this list for a classification system Source: FEGS-CS (v1.8)

NESCS Levels 2 & 2a: End-product Categories and Sub-Categories • Challenging to identify for exactly what people care about – where to draw the boundaries? Hard to define mutually exclusive categories ! • “Combined end-products”: People may care about flora, fauna, water, etc • BUT may care about combinations of these • AND different people may care about different combinations • Or, they may care about specific attributes of end-products .

NESCS-S Detailed Structure : Examples

NESCS-S Tree Structure

End-product Indicators • Attributes of end-products that people may care about may vary with • How end-product is being used? • Who is using it? • Important to define indicators to characterize different attributes of end-products • Stock indicators • Flow indicators • Quality indicators • Site characteristics indicators • Indicators to characterize extreme events such as floods, etc

NESCS 4 – Group Structure: Demand Side FEGS-CS Beneficiaries

Implementing NESCS Objective (Step 2) Step1: Identify the point of handoff from the ecosystem to human beings - NESCS-S Step 2: Identify ways in which end-products are used by human beings - NESCS-D • Direct Uses: What are the main ways in which humans directly use and appreciate these endpoints? • Some direct use categories may apply to multiple different end –products (E.g., the end -products water and air are both directly used for energy) • Some direct use categories may apply to multiple different direct user categories (E.g., direct use of water for industrial processing (e.g. cooling) could apply to many NAICS categories) • Direct Users: Which sectors are involved in these direct uses?

Example of “Use Table”: Relating NAPCS and User (NAICS) Categories Which commodities (Row) are used by which sectors/users (Column)?

Accounting Framework Used by UN (SEEA): An Example Showing a Use-Table for Water • Same user could be linked to different uses (column). • Same use could be linked to different users (row). • Entries are in cubic meters of water but could be converted to values by using appropriate prices

Direct Use Categorization • Important to distinguish between 1) how endpoints are used (direct use) 2) what the endpoints are used to produce (direct user) For example: • Irrigation is a direct use • Crop production relates more to the NAICS direct user category • Consistent with standard valuation frameworks including “Total Economic Valuation” (TEV) Framework (Next Slide)

National Ecosystem Services Classification System (NESCS) Part 1: Conceptual Framework and Basic Design