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Jean-Louis Weber Senior adviser on economic and environmental accounting, ad h., European Environment Agency The same rule of self-destructive financial.

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Presentation on theme: "Jean-Louis Weber Senior adviser on economic and environmental accounting, ad h., European Environment Agency The same rule of self-destructive financial."— Presentation transcript:

1 Jean-Louis Weber Senior 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 dont 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 Services International 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

2 Accounting for nature: recurrent policy demands Cost and benefits of meeting policy targets Water Framework Directive good ecological quality of catchnments, full recovery of costs EU Climate change programme carbon emission offset costs Environmental Liability Directive remediation costs of impacts Natura2000 (as application of ELD 2004): restoration or replacement of degraded sites costs And environmental sector policies: agriculture, regions, energy… Adjust or supplement GDP GDP 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 economy Decoupling 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

3 17 Mio km2 22 Mio km2 Available 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

4 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.

5 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.

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

7 Consumption of fixed capital in the UN SNA 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 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/ consumption Neither 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?

8 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.

9 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 Regulating Recreating 2 - Non produced assets/ other services: mostly common goods, could be traded Provisioning

10 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

11 Accounting for ecosystem services & capital maintenance: example of the agro-ecosystem A C B A C B Land parcels, soil quality, slope, vegetation, biodiversity Biomass primary production, soil regeneration, buffer Crops, amenities, habitat for wildlife, carbon sequestration, pollination Food, fibre and agrofuels, tourism, habitats & carbon Sales by farmers of agriculture products, ecotourism, fees, rents, subsidies Free leisure, human health, biodiversity and soil conservation Full income supported by agriculture products (e.g. field to food total chain & distribution), agro-tourism… Soil degradation (erosion, compaction, intoxication), landscape degradation, prevalence of diseases… Shift to agriculture best practices, abatement from non-sustainable yields, hedgerows restoration… Payments to get usage of ecosystem services: market price of commodities, transaction price of land Implementation of norms, laws & policies (CAP 2 nd pillar, WFD, Nature…) Payments to maintain benefits (maintenance works, insurance, taxes…)

12 Natural resource & services (left) vs. systems health (right) Based on a painting by Niki de St Phalle

13 Policies: Resource Use and Ecosystem Capital Maintenance ECOSYSTEM CAPITAL MAN-MADE CAPITAL Land Water Bio-Carbon Fauna-Flora Functional Services Commodities Biodiversity Agriculture policy Regional policy Transport/ urban policies Energy policy Environmental policies Fossil energy and materials Natural Resources Inputs & Residuals

14 Products & assets Fossil energy & materials Bio-carbon Water Land functional services 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) Ecosystem potential (capacity to deliver services) Ecosystem productivity Flows Accumulation 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 system Nature (SUM) Use of natural resources

15 Valuation: macro and micro economics

16 Operation costs E.S n Operation costs E.S 5 Operation costs E.S 4 Operation costs E.S 3 Operation costs E.S 2 Operation costs E.S 1 Stocks & flowsHealth Land cover Biomass/Carbon Soil Biodiversity Water catchments Sea Atmosphere Vigour Organisation Resilience Autonomy Healthy 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… Ecological Taxes, Subsidies, Tradable Offset Certificates / Depreciation... Ecosystem services valuation Bottom-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

17 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 doesnt 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

18 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 doesnt 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 exist 2.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

19 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

20 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

21 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 and a discussion forum at (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

22 Table E.2: Thematic, Class and Group Structure Proposed for CICES Source, CICES proposal, Roy Haines Young and Marion Potschin eds, EEA, 2010

23 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…) doesnt 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)

24 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: P:2 x 3 matrix x:3 x 1 vector z: 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

25 Step 2: Assumption that an economic activity does not longer exist or ceases its production (elimination of column 2 and row 2, respectively) woS2 A:2 x 2 matrix woS2 y:2 x 1 vector woS2:without Sector 2 25 Wuppertal Institut: José Acosta Fernández The hypothetical extraction approach

26 Step x: Calculation of reduction of total production due to ceasing of the production by sector 2 a) x = T x t – woS2 x t b) TE = Total effect = x – x 2 x : Direct and indirect total domestic production of the whole economy induced by sector 2. It includes the own production of sector 2. x2x2 : Own domestic production of sector 2 E S2 : 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 system Step z: Calculation of Gross Value Added effect by sector 26 Wuppertal Institut: José Acosta Fernández The hypothetical extraction approach

27 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 EEA workshop 27 Wuppertal Institut: José Acosta Fernández

28 Implementing accounts for ecosystem restoration costs

29 Simplified Ecosystem Accounts for Degradation & Depreciation : a Cubist Approach Multi-criteria diagnosis Georges Braque – Harbour in Normandy, 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 Landscape Ecological 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 (the Landscape Ecological Potential) Carbon/ biomass (carbon, biomass, diversion from Nature) Biodiversity Index (rarefaction, loss of adaptability) Dependency Index (land, soil, energy, water, N,P,K...) Change in TEP * = Consumption of Ecosystem Capital No valuation of ecosystem assets is needed

30 Change in Total Ecosystem Potential Services Sectors Spatial Units Basic physical balances Spatial Units Health counts Water resource, supply & use Land Use (surfaces & commoditie s) 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 from regulating 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 Expenditure accounts 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 Units Indexes Water Index (exergy loss from evaporation & pollution) Landscape Index (the Landscape Ecological Potential) Carbon/ biomass Index (carbon, biomass, diversion from Nature) Health Index (human, wildlife and plants populations) Biodiversity Index (rarefaction, loss of adaptability) Inter- dependency Index ( land, soil, energy, water, N,P,K...) Maintenance/ Restoration Costs Ecosystem capital depreciation degradation mean Implementation priorities Fast track implementation of simplified ecosystem capital accounts in Europe / costs

31 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

32 Landscape ecosystem potential and change Improvement Degradation

33 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$

34 International Trade Statistics: Virtual land use & agriculture footprints Trends in EU virtual land flows: EU agricultural land use through international trade between Manel van der Sleen, EEA 2009 Accounting for embedded water, carbon... is part of ecosystem capital accounting

35 Back to GDP...

36 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

37 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 = 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

38 [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 Capital GDP Consumption of Material/Energy GDP Domestic + Foreign Ecological Liabilities Domestic +Foreign Ecological Finl Assets ES based Sustainable Income Sectors 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

39 [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

40 Thank you for your attention! Jean-Louis Weber

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