Solutions for Sustaining Natural Capital and Ecosystem ... · Jean‐Louis Weber, 7 June2010...

Jean‐Louis Weber, 7 June 2010

Jean‐Louis WeberSenior adviser on economic and environmental accounting, ad h.,

European Environment Agency

“The same rule of self‐destructive financial calculation governs every walk of life. We destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.” John Maynard Keynes 1933

“ Because National Accounts are based on financial transactions, they account for nothing Nature, to which we don’t owe anything in terms of payments but to which we owe everything in terms of livelihood.” Bertrand de Jouvenel 1968

Solutions for Sustaining Natural Capital and Ecosystem ServicesInternational Conference and Workshop – Salzau Castle and Kiel University

June 7th 2010 – June 11th 2010

Beyond GDP: Ecosystem services as components of progress, wealth and well‐being


Accounting for nature: recurrent policy demands

Cost and benefits of meeting policy targetsWater Framework Directive “good ecological quality of catchnments”, “full recovery of costs”

EU Climate change programme carbon emission offset costsEnvironmental Liability Directive remediation costs of impactsNatura2000 (as application of ELD 2004): restoration or replacement of degraded sites costsAnd environmental sector policies: agriculture, regions, energy…

Adjust or supplement GDPGDP and Beyond “dashboard” of pressure indicators + “basket” of impact indicators

“Stiglitz/Sen/Fitoussi” report focus on Income (underinvestment) and Consumption (overconsumption)TEEB (G8+5 initiative, UNEP, CBD) benefits from ES (+ ecosystem capital accounting)

Environmental performance of the economyDecoupling from resource use and generation of residuals / Material flows accounts

Decoupling from impacts / Life cycle analysis

+ insisting demand for information fit to be used in the actual decision process (incl. during the budgetary debates) Fit for policy trade‐offs both physical and monetary indicators

Annual updates, like GDP nowcasting

Ecosystem capital accounting – fast track implementation by EEA & Eurostat


17 Mio km2 22 Mio km2Available

cropland

Solutions:technology & change in

consumption patterns

Solutions: conservative land

use & soil ecological

management

Without soil conservation (land use) and soil ecological management, technological/economic solutions are not likely to be effective... And reciprocally...

GDP and the need to account for resource use and the ecosystem capital


Accounting, transparency and prudence

• All accounting guidelines and norms have been established against opaque handling of money and possible manipulation of accounting reports and statistics.

• Business accounting standards require “completeness” and “maintenance of capital” for “determination of profit”.

• Requirements for national accounts are quite similar. They include “consumption without reducing ... real net worth”.


Concepts of Capital Maintenance and the Determination of Profit

“104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance:

• (a) Financial capital maintenance. (...)

• (b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.”


SEEA2003: enlargement of SNA1993 (now 2008)for a better description of the economy‐environment relation

Natural resources EcosystemsEconomic

assets (SNA) Non-economic

assets

Openingstocks

Opening stocks Opening State

SNAtransactions

and otherflows

⇒Changes in

stocksChangesin stocks ⇐

Economicactivities,

naturalprocesses,

etc.

⇒ Changesin state

Closing stocks Closing stocks

Closing state

Described in SNA

RM HASSAN ‐ UN The System of Environmental and Economic Accounting (UN 2003) ‐RANESA Workshop June 12‐16, 2005 Maputo

Volume 1

Statistical Standard

expenditure, taxes, hybrid accounts, physical flows,

sub‐soil, energy, water land,economic assets depletion

Volume 2

Non Standard Accounts

ecosystems, quality,

valuation…

Revision SEEA2012/13

Macro‐ecological closure(non‐linear feedback, spatial issues)

Impacts on ecosystems & related services/benefits


Consumption of fixed capital in the UN SNA 2008“6.240 Consumption of fixed capital is the decline, during the course of the accounting

period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage.

6.241 Consumption of fixed capital does not, therefore, cover the depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas…”

Depreciation of natural assets in financial corporate accounts Subsoil Assets plus Timber and Fish stocks are depreciated for computing profit and (net) fiscal benefit.

Ecosystem capital depreciation/ consumptionNeither business accounts nor national accounts are recording it. Consumption of ecosystem capital is however an important variable when looking at sustainability issues for both business and governments.

Where are we, regarding ecosystems?


What is ecosystem capital?

• All ecosystems: forests, wetlands, heathland, grassland, sand and dunes, rivers and lakes, lagoons, estuaries, the sea, the atmosphere, the soil, agro‐systems, and urban systems…

• Ecosystems services are made of– resources which can be privately used (being privately or collectively owned): land,

crops, timber, fish, water…

and – functions like ecosystem renewal capacity and life support which are public goods

• Ecosystem state depends on resource extraction/harvesting which should not go beyond threshold values. Resource depletion and ecosystem degradation are entangled.


3 – Ecosystem healthy state: public good, non-rival, non-exclusive use, non-transferable ownership rights

(green taxes as general source for maintenance, but offset certificates could be traded or leased)

1 – SNA produced & non produced

assets: mostly for

commodities (private goods & govt services)

Assets, services and values: 3 dimensions

2 - Non produced assets/ other services: mostly common

goods, could be traded


Primary benefits, externalities &

rents [mostly private]

Sustainable macro economic benefits, sector functional

income

Non valued private &

collective benefits [mostly public good]

Benefits from ES [private &

collective well being]

Ecosystem biophysical structures & processes[landscapes,

biodiversity, Net Primary Production...]

Ecosystem functions

[nutrient cycling, water regulation,

habitats, biomass...] Ecosystem services

[provision, regulation, socio‐cultural services]

Payments to get usage of commodities & assets embedding

ES[purchaser price, lease, fee & royalties]

Physical flows

Monetary flows

Weber, J.‐L., 2010,

adapted from Haines‐Young, R. & Potschin, M.

Payments to maintain ES benefits

[actual protection expenditure

embedded into prices,

insurance premiums, annuities & interest of loans,

green taxes,green subsidies]

Additional payments stated policy targets needed to restore ecosystem capacity up to [corporate & public accounting norms, environmental

laws & regulations, international conventions]

Total ecosystem maintenance & restoration costs

Sustainability of ES use, [ecosystem degradation,

resource depletion]

Accounting for ecosystem services & capital maintenance


Natural resource & services (left) vs. systems health (right)

Based on a painting by Niki de St Phalle


Policies: Resource Use and Ecosystem Capital Maintenance

ECOSYSTEM CAPITAL MAN‐MADE CAPITAL

Land

Water

Bio‐Carbon

Fauna‐Flora

Functional Services

Commodities

Biod

iversity

Agriculture policyRegional policy

Transport/ urban policiesEnergy policy

Environmental policies

Fossil energy and materials

Natural Resou

rces

Inputs & Residuals


Products & assets

Fossil energy & materials

Bio‐carbon

Water

Land functional services

Economy performance

Economic growthTradeValue‐added, income, profit… ConsumptionInvestment Wealth (non‐financial and financial assets)

Economic health(net savings, assets and debt quality, accountability, prices, well‐being, knowledge)

Ecosystem potential (capacity to deliver services)

Ecosystem productivityFlowsAccumulation Stocks

Ecosystem health(biodiversity, integrity, resilience, interdependence)

Capital maintenance

(allowance “set aside” from the previous accounting period)

Accounting for the performance(s) of 2 co‐evolving systems: resources, productivity and health

Economic systemNature

(SUM)

(SUM)

Use of natural

resources


Valuation: macro and micro economics


Operation costs E.S n

Operation costs E.S 5





Stocks & flows HealthLand coverBiomass/CarbonSoilBiodiversityWater catchmentsSeaAtmosphere

VigourOrganisationResilienceAutonomyHealthy populations

Ecosystem / public good protection (all services)

Service 1: e.g. timber provision

Service 3: e.g. eco‐tourism

Service 4: e.g. water regulation

Service 2: e.g. fish provision

Service 5: e.g. existence

Service n

Service 1 value

Service 4 value

Service 3 value

Service 2 value

Service 5 value ?

Service n value ??

Ecosystem Accounting: Green National Accounts and Costs‐Benefits Analysis

National Accounts =the macro-economic picture

adjusted for natural capital depreciation

Benefits & Costs Assessments =inclusive accounts for projects,

sectors…

1 32 4 5

Ecological Taxes, Subsidies, Tradable Offset Certificates / Depreciation...

Ecosystem services valuationBottom‐up, individual preferences, market and shadow prices,

Costs‐Benefits Analysis, General Equilibrium model

Top‐Down, collective preferences, multi‐criteria decision (economic & social values, long term targets…), Consumption of Ecosystem Capital

Ecosystem restoration costs

Ecosystem capital

n

Service 2: e.g. fish provision

2


Natural assets valuation and depreciation

• Non renewable assets and wealth maintenance, depletion• Depletion as difference between assets value at 2 dates• Problem when assets market prices statistics are uncertain use of the Net Present Value of future benefits as a surrogate (SEEA2003, SNA2008)

• Problems when using NPV: price volatility on speculative markets; depletion valuation uncertain and not considered as a capital consumption in flows accounts (SNA2008)

• A more robust solution: the El Serafy “User Cost” methodology. Income from assets should be maintained by reinvesting one part of the operation rent. Only physical depletion of stock needs to be measured.

• Renewable assets (ecosystems...)• Statistics on prices limited to the economic capital (owned and managed) • NPV doesn’t work (see next slides)• El Serafy rule needs to be adapted: when assets are renewable, the objective is no more to maintain income flows but instead to maintain their capacity of delivering services


Financial value of natural assets = “Net Present Value” of expected future benefits

= NPV

If surveys or econometric models tell how much homo economicus is willing to pay for ecosystem services, there is no need to monitor Nature!

“NPV” doesn’t give appropriate valuation of ecosystem degradation

Conventional economic theory: asset depreciation = difference between asset values at two dates

Two options for assets valuation (see SNA2008):1. Use assets market prices when they exist2. Use the “fair valuation” rule of financial assets when no observed or reliable price exists

NB: 1. and 2. are assumed to be equivalent under the condition of “perfect market”


Ecosystem capital accounting: asset = “quantity*quality”, only change is priced (imputed remediation costs)

Restoration

+Purchaser price =

Final Consumption at the full cost

Remediation cost

Degradation


Two approaches of benefits: bottom‐up and top‐down

1. Bottom‐up: valuation of ecosystem services• Micro‐economic valuation: case studies, CBA of projects or of sector policies • Disentangling of ES values (rents) from market values of commodities (e.g. Provisioning

services) or assets (e.g. Regulating services) and addition of contingent “non use” values.• Require strong assumptions such as discount rates and opportunity costs• Limited consistency with national accounts prices, therefore weak comparability• Theoretical and statistical issues in aggregation (e.g. “benefit transfers” issue in a general

equilibrium context)• Relevance: ecosystem assessments, support to scenarios (e.g. The TEEB/ COPI (Cost of Policy

Inaction) study)2. Top‐down: sustainable macro‐economic benefits based on ES• Acknowledgement of the difficulties above mentioned• Functional definition of benefits as Income made possible by sustainable ecosystem services • Limitations: function are non additive.• Advantages:

– Statistical feasibility using input out put analysis, – Considers the full chain of beneficiaries of embedded rents, not only the primary producers or/and

the final consumers


CICES: a general classification for accounting for ecosystem services

• CICES: Common International Classification of Ecosystem Goods and Services (CICES) for Integrated Environmental and Economic Accounting

• Cross referenced with international classifications (CPC, COICOP...)

• Discussed in 2 international workshops at the EEA, Dec.2009 and Dec 2010. and a discussion forum at http://cices.eu/

• (V1) submitted in March 2010 to the UN Committee on economic environmental accounting in view of the SEEA revision

• Aim at being a standard and the common platform for ecosystem services accounts and assessments

http://cices.eu/


Table E.2: Thematic, Class and Group Structure Proposed for CICES

Theme Class GroupTerrestrial plant and animal foodstuffs

Freshwater plant and animal foodstuffs

Marine plant and animal foodstuffs

Potable water

Biotic materials

Abiotic materials

Renewable biofuels

Renewable abiotic energy sources

Bioremediation

Dilution and sequestration

Air flow regulation

Water flow regulation

Mass flow regulation

Atmospheric regulation

Water quality regulation

Pedogenesis and soil quality regulation

Lifecycle maintenance & habitat protection

Pest and disease control

Gene pool protection

Aesthetic, Heritage

Religious and spiritual

Recreation and community activities

Information & knowledge

Symbolic

Intellectual and Experiential

Provisioning

Regulation and Maintenance

Cultural

Nutrition

Materials

Energy

Regulation of wastes

Flow regulation

Regulation of physical environment

Regulation of biotic environment

Source, CICES proposal, Roy Haines Young and Marion Potschin eds, EEA, 2010


Implementing accounts for ecologically sustainable macro‐economic benefits

• Benefits are extracted from economic statistics on the basis of surveys and/or Input‐Output Analysis (see next slide). No further modeling with elasticity coefficients, substitution assumptions…

• Ecological sustainability coefficients are directly derived from physical ecosystem accounts (degradation)

• The policy message is simple: “no fish, no fishermen, no transporters of fish, no transformers/processers, no retailers and no final consumption”

• Income distribution along the complete production/distribution chain being described, the blame for degradation (overfishing, overharvesting, intensive practices…) doesn’t fall anymore on the primary producer alone (fisherman, farmer or forester) or on the final consumer; the responsibility of every links of the chain is measured, including export‐imports.

• The cost of nature protection is not referred to a mere conservationism ideal but to the sustainability of agriculture, forestry and fisheries.

• In Europe ecosystem accounting, the first three “functional services” (agriculture, forestry and fisheries) currently tested by EEA and Eurostat may be followed by tourism and water regulation (following progress at JRC)


Benefits : How to proceed in order to determine the „real significance“for the whole economy of ES based economic activity? The „hypothetical extraction“ approach

T : 3 x 3 matrix

Y : 3 x 3 matrix

P : 2 x 3 matrix

x : 3 x 1 vector

z : 3 x 1 vector

A : 3 x 3 matrix

Step 1: Calculation of input coefficents (both transaction T and primary input P coefficients)

24

Wuppertal Institut: José Acosta Fernández


Step 2: Assumption that aneconomic activity doesnot longer exist or ceases its production(elimination of column 2and row 2, respectively)

woS2A : 2 x 2 matrix

woS2y : 2 x 1 vector

woS2 : without Sector 2

25


The „hypothetical extraction“ approach


Step x: Calculation of reductionof total production dueto ceasing of theproduction by sector 2

a) ∆x = Txt – woS2xt

b) TE = Total effect =∆x – x2

∆x : Direct and indirect total domestic production of the whole economy induced by sector 2. It includes the own production of sector 2.

x2 : Own domestic production of sector 2

ES2 : Direct and indirect domestic total production of other sectors induced by production of sector 2

Step y: Application of this procedure on each sector of original production systemStep z: Calculation of Gross Value Added effect by sector

26


The „hypothetical extraction“ approach


Interpretation of „Total GVA‐Effect Matrix“ resulting of the linkage of the„Total Effects/Flows Matrix“ of hypothetical extraction with the national Gross Value Added

Backward GVA/GDP effects by sector:Total quantity of Gross Value, which cannot be added by itself and by the product suppliers of sector j, if sector j reduces or ceases its production

Forward GVA/GDP effects by sector:Total quantity of Gross Value, which cannot be added by itself and by the users of the products of sector i, if sector i reduces or ceases its production

02.06.2010 ‐ EEA workshop

27



Implementing accounts for ecosystem restoration costs


Simplified Ecosystem Accounts for Degradation & Depreciation : a “Cubist” Approach

Multi‐criteriadiagnosis

Georges Braque –

Harbour in Norm

andy, 1909

Water Index(exergy loss

from evaporation & pollution)

Bio‐productivity Index

(carbon, biomass, diversion from

Nature)

Biodiversity Index

(rarefaction,loss of

adaptability)

Dependency Index

(land, soil, energy,water, N,P,K...)

Landscape Index

(the LandscapeEcological Potential)

Health Index(human, wildlife and plants populations)

Total Ecological Potential (terrestrial ecosystems)

Total Ecological Potential (terrestrial ecosystems)

Health Index(human, wildlife and plants populations)

Water Index(exergy loss

from evaporation & pollution)

Landscape Index


Carbon/ biomass(carbon, biomass, diversion from

Nature)

Biodiversity Index


adaptability)

Dependency Index

(land, soil, energy,water, N,P,K...)

Change in TEP * € = Consumption of Ecosystem CapitalNo valuation of ecosystem assets is needed


Changein Total

Ecosystem Potential

Services

Sectors

Spatial U

nitsBa

sic ph

ysical balan

ces

Spatial U

nits

Health

co

unts

Water resource, supply & use

Land Use (surfaces

& commodities)

Carbon/ biomass resource,

supply & use

Water functions & ecosystem services

Land functions & ecosystem services

Carbon/ biomass

functions & ecosystem services

Water bodies resource & abstraction

Land cover stocks & change

Carbon/ biomass

resource and extraction/ harvesting

Water quantity & quality

Landscape patterns

Carbon/ Biomass,

productivity

Human morbidity/

environment & food security

Dependency fromregulating ecosystem services

Biodiversity related

ecosystem services

Distribution of critical areas for

health

Natural and semi‐natural habitats & species

distribution

Water, C, energy, NPK, subsidies

Ecosystem health factors

Biodiversity factors

Net external balances by

socio‐ecosystems

LCA: impacts of chemical,, on human and

wildlife health

Fishing, hunting, harvesting of

wild species (non cultivated)

Sectors

Expe

nditu

re

acco

unts Water

protection & management

Land protection & management

Carbon/ biomass

Protection & management

Health protection/ environment

Biodiversity protection

Agriculture & fishery subsidies

Virtual land, water, and carbon use

(domestic and in imports)

Spatial U

nits

Inde

xes Water Index

(exergy lossfrom evaporation

& pollution)

Landscape Index


Carbon/ biomass Index

(carbon, biomass, diversion from

Nature)

Health Index(human, wildlife

and plants populations)

Biodiversity Index


adaptability)

Inter‐dependency

Index(land, soil, energy,water, N,P,K...)

Maintenance/ Restoration

Costs

Ecosystem capital

depreciation

Φdegradation

mean

€

Implementation prioritiesFast track implementation of simplified ecosystem capital accounts in Europe / costs


Corine land cover map (CLC is derived from satellite images)

Green Landscape Index (derived from CLC)

Nature Value (Naturilis, derived from Natura2000 designated areas)

Fragmentation (Effective Mesh Size (MEFF) derived from TeleAtlas Roads and CLC)

Landscape Ecological Potential(LEP) 2000, by 1km² grid cell

LEP 2000 by NUTS 2/3

Land Ecosystem Account: Landscape Ecological Potential

and


Landscape ecosystem potential and change

Improvement

Degradation


Accounting for ecosystem capital embedded into trade

Because ecosystem capital depreciation is not recorded, the commodities based on ecosystem services are underpriced, which is reflected in smaller South‐North flows.

Global trade: the picture in US$


International Trade Statistics: Virtual land use & agriculture footprints

Trends in EU virtual land flows: EU agricultural land use through international trade between 1995‐2005. Manel van der Sleen, EEA 2009

Accounting for embedded water, carbon... is part of ecosystem capital accounting


Back to GDP...


Conditions for effective and efficient adjustment of national accounts

Important characteristics of National Accounts– National accounts are mostly based on statistics – only a few indirect

measurements (e.g. government production) and a very few estimations (constant prices, fixed capital depreciation and assets valuation when the NPV rule is chosen).

– National accounts observe the past: prices and consumption level/structure are given (NB: valuations based on willingness to pay are forward looking and include consumer surplus – therefore they are not consistent with observed market prices); in NA, the link to future is presented via subtraction of Consumption of Fixed Capital from National Income and Net Savings.

– National accounts are … national, and annual (even quarterly) macro‐economic syntheses

Adjustments of costs and benefits must meet NA standards to be effective and efficient– robust which means based on verifiable statistics and monitoring data– backed upon physical accounts and indicators;– regularly updated for meeting the policy agenda, at least once per year– and clearly interconnected with the regular macro‐economic tools


Final Consumption at Purchaser’s Price

+Consumption of ecosystem capital

embedded in Imports (minus in Exports)

+ =

Gross Domestic Product (GDP)– or +

Transfers with the Rest of World=

Gross National Income (GNI)_

Consumption of Fixed Capital=

National Income (NI or NNP)

--

Depletion of subsoil assets

--Consumption of (domestic)

ecosystem capital

=

Final Consumption at Full Cost of Commodities

Adjusted Real Net National Income

CEC: Adjustment of National Income and Final Consumption


[future] Integration with National Accounts aggregates

Final Consumption [purchaser price] Final Consumption [full cost]

Adjusted Disposable National Income National Income

Ecosystem Adjusted Net Savings Net Savings

Consumption of Ecosystem CapitalGDP

Consumption of Material/EnergyGDP

Domestic + Foreign Ecological LiabilitiesDomestic +Foreign Ecological Fin’l Assets

ES based Sustainable IncomeSectors and Social groups

ES based Sustainable Consumption ES based Commodities Consumption

Environment:mitigation of

nature degradation, compensation, restoration

Social: sustainable

consumption, new skills & jobs,

benefits by social groups

Economy: performance,

double‐decoupling, capital

maintenance, ecological debts

Sustainable macro‐economic benefits based ecosystem services

Remediation costs of

ecosystem capital

degradation


[future] Integration with National Accounts aggregates

Sustainable Development = Thriving ecosystems producing altogether:• economic resources• carbon• biodiversity• clean air, clean water• options for the future (“development as freedom” –A. Sen)

“double decoupling”

“over‐consumption & under‐investment”

“sustainable benefits from ecosystem services”

“adjusted net savings” & “ecological debts”


Thank you for your attention!

Jean‐Louis [email protected]

mailto:[email protected]

Solutions for Sustaining Natural Capital and Ecosystem ... · Jean‐Louis Weber, 7 June2010...

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