Valuation for Natural Capital and Ecosystem Accounting
Synthesis Paper
Valuation for Natural Capital and Ecosystem Accounting: Synthesis Paper
Prepared for: The European Commission as part of a contract on the provision of technical support for the development of Natural Capital Accounting (Contract 07.0202/2017/767463/SERJENV.D.2), led by UNEP-WCMC in collaboration with IEEP and UEA CSERGE. This report was prepared University of East Anglia, Centre for Social and Economic Research on the Global Environment (CSERGE)
Published September 2017
Copyright European Union 2018. All rights reserved. Certain parts are licensed under conditions to the EU
Citation Badura T., Ferrini S., Agarwala M. and Turner K. (2017) Valuation for Natural Capital and Ecosystem Accounting. Synthesis report for the European Commission. Centre for Social and Economic Research on the Global Environment, University of East Anglia. Norwich 2017.
Disclaimer: The information and views ser out in this report are those of the authors and do not necessarily reflect the official opinion of the Commission. The Commision does not guarantee the accurancy of the data included in this study. Neither the Commission not any person actting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein.
The Centre for Social and Economic Research on the Global Environment (CSERGE), University of East Anglia (UK), is internationally renowned for working at the forefront of interdisciplinary research, on a range of environmental issues. CSERGE research covers a huge array of topics such as sustainable development, the relationship between humans and the environment, natural resource valuation and management, economic instruments, land use, water, energy, wetlands and coastal zone management, climate change, ecosystem services and natural resource accounting.
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Table of Contents
0 INTRODUCTION 3
1 SUMMARY 4
2 BACKGROUND – NATIONAL AND WEALTH ACCOUNTING 11 2.1 Three approaches to natural capital accounting: 16 3 VALUATION IN/FOR NATURAL CAPITAL AND ECOSYSTEM ACCOUNTING 19 3.1 Exchange and welfare value concepts 21 3.1.1 Simulated exchange values 23 3.2 Valuing flows – ecosystem services 24 3.2.1 Valuing pollination 35 3.2.2 Valuing recreation services 39 3.3 Stock valuation – monetary asset accounts 42 4 KEY MESSAGES 45
5 BIBLIOGRAPHY 47
6 ANNEX 51
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0 Introduction
This report aims to fulfil two objectives identified with the clients (i.e. KIP INCA partners and JRC in particular). These were to provide overviews1: 1) of the main issues surrounding valuation methodologies in the context of ecosystem and natural capital accounting; and 2) of the possible approaches for valuing crop pollination and recreation within the Knowledge Innovation Project for an Integrated system for Natural Capital and ecosystem services Accounting (KIP INCA). This report might be further expanded in the future to provide an extended discussion of the valuation methodologies in context of the KIP INCA future plans. The report provides a background for Technical Support actions in Q3 and Q4 2017, aiming to support the valuation work being undertaken at the Joint Research Centre.
Following an extended summary, this report starts with a brief background on national and wealth accounting and sets out three possible generic approaches for future progress. It also indicates how natural capital accounting can contribute to wider strategy and policy analysis. It then discusses more specific issues related to valuation concepts such as exchange and welfare values and their uses and limitations which are closely related to the overarching purpose of the KIP INCA and its planned use of the derived information. Further, this report discusses the valuation approaches for flows of ecosystem services as well as how it might be possible to value assets (stocks) as part of the KIP INCA.
Complementary work has been undertaken for JRC covering specific ecosystem flows valuation in more detail (Fact sheets feedback). This material is provided in the Annex.
We would like to keep this report as a living document that would be updated over the duration of this project. This would allow for further reflection on both empirical results and data availability, resulting from Technical support Action, and the incorporation of comments and feedback from KIP INCA partners.
1 Please note that this report builds on an assumption of relative familiarity with the recent material and guidance documents related to Natural Capital accounting. Namely, it is assumed that the reader is familiar with SEEA CF 2012, SEEA EEA 2012, SEEA EEA Draft Technical recommendation (2017). Please refer to these documents for further background and information related to the recent discussions on environmental and economic accounting as well as ecosystem accounting practices.
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1 Summary
National income accounting is a method of collecting, organising and reporting desirable information on economic activity which can assist in the measurement of trends and decision making. It does not fully measure human welfare/wellbeing, nor does it include a comprehensive assessment of the impacts on the environment linked to the economic activity. National accounts are human constructs, deliberately and strategically designed and have always included a degree of pragmatism in their evolution. So what is included or excluded from the national accounts is a matter of choice (Coyle 2014). The inclusion of natural capital into this accounting context is, we would argue, also a choice and one in which a degree of pragmatism is required.
A significant problem associated with the inclusion of natural capital and ecosystem services into the national accounts is that market prices and so-called exchange values are often missing. This has led to efforts to ‘impute’ values (proxy exchange values) which have to be indirectly measured or estimated. Production function data if available are especially useful in this context. There also needs to be a recognition that the prevailing institutional governance arrangements (e.g. property rights regimes, existing laws and regulations, cultural norms etc.) will condition the ‘imputed values’ that may be observed and calculated. We also note the criticisms from some conservationists that assigning monetary values to nature will end up in the complete ‘commodification’ of the environment. While such an outcome would risk overemphasising the substitution possibilities between natural capital and other forms of capital, as well as excluding the intrinsic value nature might possess, this outcome is not inevitable. A pluralistic approach to valuing nature has much to recommend it. With this line of reasoning it is possible to discern a number of value dimensions: the value elicitation process, and the source of the value information i.e. individual community societal/cultural group; the value motivation i.e. self-regarding or other-regarding; the overall institutional context; and the value scale i.e. to society or to the individual. What is required is a pragmatic view of environmental valuation which accepts that not all aspects of nature can be meaningfully captured in money terms, but much can be treated in this way and this could bolster conservation (Turner 2016). We outline in a succeeding section how natural capital accounting incorporating monetary values can contribute to economic development plans and strategies at the national and regional level, as well as down at the project/programme level. This pragmatic approach is mirrored in the history of national accounting in debates over whether parts of the informal economy can be estimated in value terms and included in the accounts. It is also the case that a significant amount of Government spending does not directly reflect exchange values, although some is based on costs of production.
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As yet, natural capital lacks a widely agreed definition and a number of different possible approaches could claim to provide (with varying degrees of complexity, uncertainty and practicality) natural capital accounting processes. Most prominently these include:
Provide a limited extension to the measurement of economic activity via the main national income/capital accounts, or within the framework of the UN System of National Accounts (SNA) Compile physical accounts (based on, for example, land use and habitat units2) as satellite accounts, which highlight the contribution of the environment to the economy and society Compile physical and monetary natural capital satellite accounts, which are compatible with but separate from national income/capital accounts Fully integrate natural capital and ecosystem services accounts into national accounts Compile comprehensive social welfare wealth accounts (with economic welfare values linked to wellbeing) in line with sustainable development principles (weak or strong) Compile corporate natural capital accounts (identifying firms’ dependencies and impacts on natural capital in value terms).
Because each of these approaches have different objectives and answer somewhat different questions, they require different data and, importantly, different values and valuation methods. For simplicity, in the report we distinguish three broad approaches to natural capital accounting each with the following objective:
1) Development of extended SNA type accounts to include more environmental impacts, but which still follow SNA conventions and restrictions on how economic activity is measured (APPROACH ONE). This approach would hence be strictly based on exchange value concept. 2) Development of a separate set of (physical/monetary) Satellite natural capital accounts that can provide complementary information to SNA type accounts. They would serve to highlight the different contributions of the environment to the macro economy and hence allow for a degree of flexibility and fit-for-purpose design (APPROACH TWO). This approach could use different value concepts including exchange and economic welfare values. 3) Development of comprehensive social welfare Wealth accounts, these are data intensive and require a full range of shadow values for monetary valuation purposes in order to capture wellbeing (APPROACH THREE).
2 In the SEEA context the relevant spatial statistical units are Basic statistical units (BSUs), Ecosystem Assets (EA) and Ecosystem Accounting Area (EEA). See SEEA EEA 2017 for further details.
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The choice made between these different approaches will determine the form and extent of any new accounting system and appropriate economic valuation methods. But the approaches are not mutually exclusive. For example, information could be transferred from the second to the first or to the third as knowledge improves and/or changes in accounting practices are agreed. Similarly, information from accounts based on one approach could be used to complement accounts based on another approach for specific policy requirements.
The first of these approaches (APPROACH ONE) it has been argued, limits the type of values that can be utilised to incorporate environmental impacts into a monetary account. From this viewpoint only exchange values can be used, although some analysts have made the case for a wider inclusion of externality effects (Vincent 2015).Taking the example of a positive externality where an ecosystem provides a service that is an input used by a firm to increase production, the input value could be interpreted as an implicit exchange value. The input value would be measured in terms of the value of the additional output produced by the firm, and Vincent (2015) has argued that this is the maximum amount a producer would be willing to pay for the ecosystem service if a market actually existed. If this approach is to be generalised a number of practical measurement problems would need to be overcome.
The second approach (APPROACH TWO) aims to bring together a separate set of satellite (physical/monetary) accounts covering ecosystem services assets (stock) and services (flows). The objective is to ‘mirror’ changes in economic activity (expressed in the SNA type accounts) with a set of ‘environmental’ accounts which quantify and value the consequences of economic activity as it impinges on the environment and society through various drivers and pressures. An agreed baseline position and timeline is required, but a wider range of plural values can be utilised e.g. exchange and economic welfare values plus others.
The third approach (APPROACH THREE) attempts to provide a comprehensive social welfare based wealth account in monetary terms (economic welfare values). These accounts would aim to reflect the fullest possible quantification of capital assets and economic and social wellbeing impacts (including for example health and education) in order to achieve sustainable development.
The three approaches to natural capital accounting can play a diverse number of roles in the policy process. At a strategic level (e.g. promotion of the Circular Economy strategy), quantifying the natural capital asset base and the benefits it provides to the economy and society represents an important component of a national or regional economic development strategy. Such an approach would seek to increase resource use efficiency, increase resource supply security and promote eco-innovation, thereby raising the overall productivity of the economy. A monitoring system for natural capital can identify gaps in knowledge and lead to a risk register (Mace et al 2015) together with information on ‘critical natural capital’ limits. Prior identification of the pressures, drivers and threats/opportunities to natural
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capital can facilitate the move to sustainable development paths. It may also be possible to investigate societal inequalities by augmenting income data (Gini coefficient) with natural capital provision and access data. At the enabling/implementation level natural capital accounting can help in the assessment of the effectiveness of prevailing policy instruments and the practicability of policy objectives, or future policy options. The same accounting information can also play a role in individual project/programme assessment (see for example the Balance Sheet approach (UK NEA Follow On 2014; Turner 2016).
The natural capital accounting system generally conceptualises the ecosystem as the asset (stock), rather than the constituent parts. The assets are described in terms of a particular land cover class or ecosystem type and in terms of their extent and condition. Hein et al (2016) provide additional concept ideas relating to ecosystem assets, they argue that capacity, capability to supply services and the potential supply of services are necessary measures for accounting. These notions are closely related to sustainability and critical natural capital limits and thresholds thinking. The distinction between intermediate services and final ecosystem service flows used by beneficiaries, also needs to be borne in mind (Boyd and Banzhaf 2007; Fisher et al 2009). Physical accounts classify and record the extent, condition of and annual service flow from ecosystem assets. Monetary accounts put monetary values (point estimates) on final ecosystem services on an annual basis, or on the capacity to produce future flows of final services. There is a further choice to be made on monetary values: welfare and/or exchange values. The former reflect the willingness to pay for goods and services, regardless of whether they are exchanged for cash, or how much cash they would be exchanged for if they were exchanged. The latter are the value at which flows and stocks are in fact, or could be, exchanged for cash. Market prices are the reference for valuation in most official guidance (e.g. OECD 2009). The guidance continues to cover contexts in which no market price is available and recommends that if costs are also not available, then stocks and flows may be valued, as a last resort, at the discounted present value of expected returns. We take a closer look at valuation methods for ecosystem services in a later section, along with some pragmatic guiding principles.
But other problems and choices also loom large in this accounting context. It is important to clearly distinguish between stock and flow concepts. The SEEA EEA3 defines the ecosystem stock account in terms of the extent or volume of the asset and its condition or quality, at the start and end of a year. The services account shows flows over a given period of time, but with the complication that some cross-cutting service accounts will be necessary
3 SEEA EEA refers to the report published by United Nations, European Commission, Food and Agricultural Organization of the United Nations, Organisation for Economic Co-operation and Development, The World Bank (2014b) System of Environmental-Economic Accounting 2012 – Experimental Ecosystem Accounting. United Nations, New York
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in cases where some services are provided by a number of habitats. A particularly difficult challenge is posed when there is uncertainty over the sustainability of a given stock under use pressure or environmental change. The use of point estimates for ecosystem services values when non-marginal stock changes occur and thresholds are crossed is problematic. The development of ‘red flag’ (e.g. UK NEAFO 2014) warning measures in the physical accounts needs urgent attention given the uncertainties over threshold effects. If a strong sustainability position is accepted then restoration costs may play a role in any satellite account.
Stock (asset) sustainability and lifetime questions are important and add a further level of complication to the accounting task. Hein et al (2016) have put a new emphasis on ecosystem capacity and capacity accounts. The capacity relates to the sustainable rate of usage of a ‘bundle’ of ecosystem services and represents an important link to long term viability of an asset. This link is not reflected in the currently proposed approach to asset valuation relying on a net present value basis for an expected flow of ecosystem services. In a satellite account, UK ONS (2017) has suggested a proxy approach in which a minimum restoration/ replacement cost would be charged and summed over the asset lifetime (undiscounted). The acceptance of a strong sustainability worldview (with its constant capital rule) is critical to this sort of proxy method and does not fit easily into SNA practice. There is some debate over whether restoration costs are or are not equivalent to asset depreciation in national accounts. On an annual basis, the latter represents the cost of replacing the asset in its depreciated state, but the sum over all annual depreciation charges is equivalent to the cost of replacing the asset in its non-depreciated state.
The use of replacement cost values will also be conditioned by the institutional /policy context. Taking water purification as an example, this is strictly an intermediate ecosystem service which yields the final service, clean water which has an economic benefit value to consumers. However, if a formal water quality standards regime is in place then a value comparison between a wetland providing a natural purification service and a water treatment facility is a valid procedure. The costs of the two alternatives could be compared in order to derive a cost effective solution.
Asset lifetime considerations bring in the question of an appropriate discount rate. Most environmental economists agree that for environmental long lived assets a discount rate based on market rates is not appropriate. Markets are essentially driven by short term considerations. So for ecosystem assets a capacity and accounting lifetime of 100years seems reasonable, together with a declining discount rate such as that adopted in the UK, based on the Ramsey formula (e.g. ONS 2017).
The distinction between stock and flow has also been recently highlighted in work in the USA (Fenichel and Abbott 2014, Fenichel et al., 2016). This line of argument seeks to keep
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natural capital separate from ecosystem services by linking natural capital more formally to national capital accounts, with ecosystem services classified as part of the national income account. A complication with this stream of research is the necessity to accommodate the “scarcity effect” of natural capital depletion and the effect on market prices. This problem seems to have been overcome in some empirical cases on groundwater and fisheries compiled by these analysts (see sections in the main report).
The environmental economics literature now contains a range of tried and tested valuation methods and techniques for market and non-market goods and services which can in principle be used to value ecosystem services flows. For accounting purposes a clear, explicit and consistent application of valuation methods is important. For example, ONS (2017) have suggested a number of principles as guidance in the valuation process which we have reinterpreted as follows:
Use of a particular technique should be clearly explained and related to the underlying biophysical assessment process Valuation methods should be transparent, intuitive and replicable Where possible calculated values should be compartmentalised into their ‘price’ and ‘quantity’ components ‘Benefits transfer’ potential for using available estimates should be explored with caution.
Four broad categories of valuation methods are potentially available: Market-based methods (using market price values) Revealed preference methods (related to the behaviour of individuals and the expenditure they incur) Cost-based methods Stated preference methods (related to the answers provided by individuals when responding to survey questions about their willingness to pay for something).
A fuller discussion of these methods is provided in a later section of this report.
The diverse range of methods for valuing flows of ecosystem services (e.g. Freeman et al 2013) that are available to some extent reflect the prevailing set of different policy objectives and contexts. An important first step in the process of developing natural capital accounts is to get clarity and agreement on the broad approaches to accounting and the related policy objectives. For example, while more effort might be put into developing a full set of SNA-compatible natural capital accounts, specific satellite ecosystem service accounts might also be constructed to provide complementary information (e.g. pollination accounts).
The ultimate objective of development of natural capital accounts is facilitation of better-informed decision making. The debate surrounding the use of valuation methods for
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the natural accounts is far from settled. Since both the potential use and possible methodologies are not yet fully clarified, we would argue that an open approach in the context of KIP INCA might be taken to valuation methodologies. Nevertheless, this pragmatism should involve a clear identification of and clear specification of the agreed goals for the use of accounts. The work within the KIP INCA context allows grounds for testing some of the approaches as well as comparing results under different approaches. This is an opportunity that should be fully, but carefully, exploited.
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2 Background – national and wealth accounting
Current macroeconomic decision making is largely guided by the information derived from the System of National Accounts (SNA; EC et. al. 2009) and its flagship policy indicator, the Gross Domestic Product (GDP). Despite its frequent and (unfortunately) common public interpretation as a welfare index, GDP does not provide a comprehensive picture of welfare changes (Dasgupta 2009). It is clearly a fundamental component of overall wellbeing and is a necessary but not sufficient measure of welfare. GDP is a gross flow measure, building on SNA’s objective to “compile measures of economic activity in accordance with strict accounting conventions based on economic principles” (EC et. al. 2009, para 1.1). It accounts for flows of economic activities for a specified accounting period, however it omits some non-market goods and services. This has consequences for environmental protection policy. Rather than GDP, a stock of wealth indicator is required to measure intertemporal sustainable growth and development progress.
Recent decades have seen an increased realisation of the need to better understand and manage the relationship between human society and the environment. Decreases in environmental quality have led to calls for improvement in our measurement systems for sustainable development. A spectrum of approaches can be envisaged for this task. On one end of this spectrum are different variants of a limited extension of national accounting that incorporate environmental and ecosystem assets into its measurement system4. The environmental and ecosystem accounts could also be constructed as satellite accounts that are not integrated within the SNA system. These could be biophysical only, or also encompass monetary accounts. A future and ambitious goal might be to fully integrate ecosystem services into SNA system. At the other end of the spectrum of approaches to natural capital accounting is wealth accounting. On a conceptual basis, some of these approaches differ in the focus of their measurement systems and hence their ultimate usability potential for policy making. While national accounting is focused on the flows of economic activity over an accounting period (usually a year), wealth accounting focuses on the changes in the (as far as possible) comprehensive set of stocks of capital assets underpinning economic growth. In other words, national income accounting focuses predominantly on the (changes in) flow of economic activities, wealth accounting aims to measure (changes in) stocks of assets that condition the flows. These different approaches offer useful insights for policy making and present different, and to certain extent
4 Note that, due to focus of this report on the accounting for environmental and ecosystem goods and services, we omit in the following discussion the social dimension of sustainable development. Nonetheless a substantial progress has been made in understanding and data collection on indicators related to social capital.
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complementary, alternatives and context for assessment of economic growth and development. We feel that it is important to keep in mind the different possibilities for the KIP INCA.
As it is predominantly focused on market activity5, SNA is missing important information that is relevant for the assessment of growth in its broadest sense. Indeed, important omissions of SNA’s measurements have been discussed since its inception in the 1950’s. Some contributions to economic activity are not reflected in the national accounts. In particular, as a systematic measurement tool of economic activity, that aims to measure output in terms of goods and services exchanged in markets, national accounting omits economically, socially and environmentally important non-market goods and services. From an economic point of view, for example, the SNA disregards unpaid work that takes place at home which might significantly skew the view of economic production and economic growth (see e.g. Landefeld and McCulla 2000). Similarly, a number of ecosystem related goods and services (e.g. soil formation, fish nursery grounds) that support economic activity are invisible in the SNA in the sense that they are implicit, but not explicit in their contribution to production (e.g. food production, fisheries). Other ecosystem related goods and services are omitted from the SNA in different ways. Their role in supporting human wellbeing is not explicitly recognized and while some can be included in the prices of other goods and services (e.g. amenity value of landscapes increasing property prices or increased tourism revenue in the area), in some cases their value is ignored altogether (e.g. the value ascribed to an existence of endangered species or the carbon sequestration and storage value of some vegetation covers). An underestimation of the role of the environment in economic and other human activity contributes to inefficient management and potential environmental degradation.
Recent efforts, especially the System of Environmental-Economic Accounting, Central Framework and Experimental Ecosystem Accounting (SEEA CF6 and SEEA EEA) aim to extend and integrate the national accounts for environmental and ecosystem assets. Ecosystems are viewed as assets that contribute to SNA-measured economic activity, but also as assets that generate economic and human activity outside of SNA’s current measurement system. This extension might effectively allow a) understanding how much economic activities are dependent and/or impact on environmental and ecosystems assets and b) extending the measurement of national accounts to some ecosystem services that
5 We acknowledge that SNA includes the public services provides by Government (such as schooling, hospitals, defence and so on). It breaks these down into collective and individual public goods. But valuation is on the basis of the cost of providing those services. 6 SEEA CF refers to the report published by United Nations, European Commission, Food and Agricultural Organization of the United Nations, International Monetary Fund, Organisation for Economic Co-operation and Development, The World Bank (2014a) System of Environmental-Economic Accounting 2012 – Central Framework. United Nations, New York
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contribute to human wellbeing that were previously fully or partially missing in national accounting (e.g. air and water purification provided by various vegetation types).
SNA and SEEA measure flows and stocks related to economic and human activity by collecting, organising and reporting associated information. The SEEA’s major addition to SNA is the collection of physical data related to environment and ecosystems and the organisation of it in a coherent manner following SNA conventions. Employing the exchange value concept it aims to monitor the value of flows over the accounting year and change in the value of assets. It relies on the market prices of goods and services exchanged in the markets; or the ‘assumed’ transaction prices for goods and service that have no market.
The extension of SNA to ecosystem related goods and services represents a welcome start in broadening our measurement of “what matters” for sustainable development decision making. The systematisation of physical data on ecosystem assets is likely to support numerous possible analyses and evidence gathering beyond national accounting. In particular, it might support further development of and facilitate the broader use of wealth accounting.
Wealth accounting aims to address the limited scope of national accounts and GDP by focusing on the changes in capital stocks that are reflecting the changes in overall wealth. SNA does not allow a charge for depreciation of natural assets to be included in income and production accounts. GDP was always meant to be used strictly as a measure of economic production (e.g. UNU-IHDP and UNEP 2012).The inability of main indicator commonly used to guide policy - GDP - to measure natural capital depreciation is seen by some as its major shortcoming (e.g. Dasgupta 2009). A policy of maximising the rate of economic growth may result in a decrease in overall wealth or human wellbeing. SNA accounts for the depreciation of reproducible capital7, however it does not account for the depreciation of natural or human capital. As such SNA is not fully suited to assess changes in the overall wealth of countries, or to signal possible suboptimal development trajectories.
Wealth accounting aims to augment the current target indicator for economic policy, GDP, by a measure of wealth that can evaluate the changes in capital assets that all add together to build a country’s wealth. From this perspective, an economy’s wealth is composed of reproducible capital (infrastructure, buildings and machines), natural capital (renewable and non-renewable natural resources) and human capital (education and health)8. The economic indicators should reflect a measure of this wealth that accounts for the depreciations of all capital assets. In contrast to national accounting, wealth accounting
7 We acknowledge that the reliability of reproducible capital depreciation in SNA can be questioned. 8 Note that wealth accounting might tend to stress intangible wealth such as social and institutional capital, technology, etc.
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estimates the shadow prices of capital assets – which in this context translate as the contribution of a marginal unit of the asset to human wellbeing (see section below for further discussion on welfare or shadow prices).
Two main initiatives represent the current approaches to wealth accounting: the comprehensive wealth approach of the World Bank9 (World Bank 2006, 2011) and The Inclusive Wealth Report10 (UNU-IHDP and UNEP 2012). These two approaches provide initial insights into the extended use of wealth accounting which can encompass the construction of natural capital accounts.
Needless to say national and welfare accounting aim to provide measurement approaches guided by different objectives (see also box below). While the former is focused on measuring flows (economic activities), the latter aims to measure stock (wealth). Measuring wealth is more difficult, but of significant importance and interest to decision making - after all it is the stock of natural capital that underpins the flows of benefits from it. SEEA EEA can be seen as a significant step from the SNA system towards comprehensive wealth accounting. The latter, however, remains a complex and ambitious long term goal. The Inclusive Wealth Index (IWI) for example requires a large amount of shadow price data and in principle should include health and education among other things. Due to computational difficulties health was not included in the index, despite its obvious importance in wellbeing UNU-IHDEP-UNEP (2014). For a critique of the IWI and suggestions for substitute information (e.g. sustainability limits linked to critical natural capital assessments) see Roman and Thiry (2016).
9 In its approach, the World Bank accounts for exhaustible resources, renewable resources and agricultural land. The wealth measure also includes intangible capital (raw labour, human capital, social capital and the quality of institutions). 10 This approach accounted for reproducible capital, human capital, knowledge, natural capital, population, institutions and time.
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Box 1: Weak vs. strong sustainability
Related to the debate on which measurement system should underpin public decision making is the long standing debate between supporters of weak and strong sustainability. Assuming sustainability (i.e. non declining overall stock of different forms of capital), the critical issue that the opponents in this debate is the degree to which natural capital is substitutable for other forms of capital. The proponents of strong sustainability see some components of natural capital (‘critical natural capital’) as non- substitutable and as such it should be conserved and protected so that its overall stock is not decreasing over time. Weak sustainability accepts depletion of natural capital, as far as this decrease is offset by innovation and technical progress which increases efficiency of usage and/or the role of other forms of capital. This paradigm is historically more broadly reflected in our society – e.g. in land use change, such as transforming stocks of forests to agricultural production or through use of fossil fuels to produce man made capital.
The two standpoints could be seen at the opposite sides of a spectrum of political and philosophical positions stakeholders might take to the management of the environment. What each person, company, country or organisation adopts as her/his/its worldview, is likely to define the choice of measurement system to account for sustainable growth. Further the positions held from this spectrum might be different for different aspects of natural capital. For example, for some aspects of natural capital society/individuals can hold a strong sustainability perspective (e.g. species and ecosystem protection under the Habitat and Birds directive), but weak sustainability perspective for other aspects of natural capital (e.g. converting some components of natural capital to infrastructure allows increase in social capital in terms of mobility and economic growth). Indeed, it seems important to consider carefully which components of natural capital society deem to be substitutable and which not.
The standpoint on the weak vs strong sustainability would be reflected in the measurement system one adopts. From the three approaches specified in section 2.1, Approach 3 (Wealth Accounting) can, if feasible, provide a measurement framework that would allow measurement of progress in strong sustainability terms. Approach 1 and 2 can provide measurement frameworks for weak sustainability position, although Approach 2 information could also be used to impose ‘critical natural capital’ conservation rules and regulations in line with strong sustainability.
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2.1 Three approaches to natural capital accounting:
The approaches to natural capital accounting described above could be seen on a spectrum with on one side represented by strictly SNA-compatible accounting and on the other side wealth accounting. An approach that uses satellite accounts is positioned between the two.
We take a pragmatic approach towards testing of natural capital accounting and we specify three broad approaches that can be adopted in its development. We believe that such a perspective allows flexibility for countries to develop and test accounts, depending on their individual pressing policy needs. Our perspective does not aim to underplay the importance of economic theory underpinning natural capital accounting – we would argue that theoretical basis of accounts should be developed in parallel to actual testing of the accounts and requires joint effort between economists, natural scientists and statisticians.
The three approaches can be characterised as follows:
1) APPROACH ONE (SNA Accounting): The objective under this approach is to develop extended SNA type accounts to include more environmental impacts, but which still follow SNA conventions and restrictions on how economic activity is measured. This approach would hence be strictly based on exchange value concept (see section 3.1 below) and would only consider the components of the natural capital for which exchange values, or imputed exchange values, can be estimated. In this approach the current SNA conventions and measurement principles together with data availability dictate which components of natural capital that can be included in national accounting. 2) APPROACH TWO (Satellite accounts): The objective under this approach is to develop a separate set of (physical/monetary) Satellite natural capital accounts that can provide complementary information to SNA type accounts. These satellite accounts would serve to highlight the different contributions of the environment to the macro economy and hence allow for a degree of flexibility and fit-for-purpose design. This approach could use different value concepts including exchange and welfare values depending on the planned use of the accounts and data availability. While some of the constructed accounts under this approach can be directly compatible with SNA accounts (hence in exchange value), other can be compatible indirectly (e.g. through matching spatial statistical units/areas). 3) APPROACH THREE (Wealth Accounting): The objective under this approach is to develop comprehensive social welfare Wealth accounts, such as the IWI. The Wealth accounts are data intensive and require a full range of shadow values for monetary valuation purposes. This approach would use,
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when possible, shadow prices and otherwise exchange and welfare values when appropriate. From a strong sustainability policy point of view this is the most desirable type of account but in practice it is proving difficult to meaningfully reflect a comprehensive range of external costs and benefits with links to wellbeing.
The activities surrounding SEEA EEA and SEEA CF indicate that the future goal is an integrated account (Approach one) - i.e. fully compatible SNA type accounts with an extended production boundary.11 Other initiatives related to wealth accounting would be further enabled by Approach two.
The three approaches are not mutually exclusive and it is foreseeable that efforts within each approach could support each other. For example, the development of SEEA EEA and SEEA CF might be useful for all three approaches. We would argue that each approach has its advantages and disadvantages. Approach one would be compatible with a historically used and significantly developed and tested accounting systems and practices. At the same time this approach risks ignoring components of natural capital for which exchange values cannot be derived; and/or might disregard some dimensions of natural capital values that might be important (e.g. non-use values, broader welfare values of ecosystems). Approach two’s main advantage is its flexibility and fit-for-purpose orientation that allows use of different data and, in particular, range of existing valuation studies for deriving monetary values for natural capital accounts. Its disadvantage is that as the set of accounts becomes more comprehensive it becomes more difficult to derive indexes of change, or to rank order indicators. The third approach is in principle the most suitable measurement system for an assessment of the development process – in social, economic and environmental terms. However it is also the most difficult approach in terms of meaningful data/information – it requires difficult estimations of shadow prices and as comprehensive a data set as possible on all three dimensions of progress.
A particularly divisive issue across the three approaches is the use of non-market valuation. Vincent (2015) has made the case for incorporating non-market valuation directly into the main national accounts. He uses environmental externality and public goods concepts to argue that there is a transaction (in money terms) between economic agents involved in the activities generating external effects. Therefore there is a basis for arguing for the incorporation of non-market values into national accounts. It seems to us that in practice this line of reasoning is similar to the use of production function data to generate values; and
11 Note that SEEA EEA (2017) explicitly recognise (see 2.10) that it might be possible or desirable to construct accounts that, for example, adopt different valuation concepts to suit particular policy needs – in line with what we describe as approach two.
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satellite accounts, it could be argued, allow more flexibility and range of coverage in terms of environmental impacts and values.
We believe that thinking about the development of natural capital accounting in terms of what the final objectives of the accounts will be might be helpful in facilitating more experimentation and allow progress in natural capital accounting. Keeping the three approaches listed in this section in mind, the next sections will discuss the valuation methodologies and issues relevant to the KIP INCA.
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3 Valuation in/for Natural capital and Ecosystem Accounting
Building on the discussion above, it is important to note that accounting relies on two key concepts of stocks and flows, where stocks are measured at a specific point of time and flows are measured over selected time period. Following the SEEA EEA conceptual framework (see Figure below) the concept of stock translates to spatially delineated ecosystem assets that produce flows of ecosystem services. Ecosystem accounting aims to measure both flows of ecosystem services over an accounting period (usually an accounting year) as well as to monitor changes in stocks of ecosystem assets.
Figure 1 General Ecosystem Accounting framework [Source: SEEA EEA]
Ecosystem services contribute to two types of benefits. Many ecosystem services are already present in national accounts (e.g. crops, timber, some aspects of tourism/recreation) and these are in SEEA EEA terms called SNA benefits. The inclusion of ecosystem services contributing to the production of SNA benefits leads to increases in intermediate consumption, but does not have any effect on the overall level of income/GDP. Ecosystem services contribution to production of benefits that are not accounted for in SNA - Non-SNA benefits – lead to an expansion in the measures of output and hence changes (increases/decreases) in GDP.
The SEEA EEA envisions the following five ecosystem accounts:
Ecosystem extent account – physical terms
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Ecosystem condition account – physical terms Ecosystem services supply and use account – physical terms Ecosystem services supply and use account – monetary terms Ecosystem monetary asset account – monetary terms
The five accounts could be considered as satellite accounts of the SNA, however they do not depend on the SNA accounts for their compilation (SEEA EEA 2017). Recent discussion have also raised a possibility to compile ecosystem capacity accounts (Hein et al. 2016, SEE EEA 2017).
Assuming available biophysical data from physical accounts, valuation techniques can be employed to provide monetary ecosystem service accounts and monetary ecosystem asset accounts. The valuation step is essential if an integration with the SNA is required. However, the valuation of nature-related goods and services is one of the most contested topics and is conditioned by the adoption of different weak or strong sustainability worldviews (see Box above). The debate exposes profound differences and as such is far from settled, including the choice of adequate valuation concept and methods (e.g. SEEA EEA, Obst et al. 2015, SEEA EEA 201712). See the discussion of the appropriate valuation concepts further below.
Single ecosystem service flows from ecosystem assets are valued using the most appropriate techniques in light of available data. Note here that it is crucial to identify the benefits/beneficiaries, since without the demand there are no benefits and hence no ecosystem services. As such, actual service usages need to be identified to value the flows of services over the accounting period. This also holds true for expected future use of ecosystem services to estimate asset values where identification of patterns of use is of crucial importance.
The identification of the actual use of services might differ across service types. For example, most provisioning services’ usage will be reflected in increased extraction or output quantities (e.g. food produced, timber harvested). In contrast, the usage (and value) of many regulating and cultural services generally increase with the number of people in the relevant area (e.g. flood protection, air and water purification or recreation).
The asset valuation in SEEA is expressed through the Net Present Value of Expected Ecosystem Service flows from an ecosystem asset, assuming current consumption patterns. However other theoretically possible approaches for asset valuation have also recently
12 SEEA EEA 2017 refers to the draft consultation report “SEEA Experimental Ecosystem Accounting: Technical Recommendations” released on 6th March 2017 and developed by UNEP / UNSD / CBD project on Advancing Natural Capital Accounting funded by NORAD.
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materialised (see later section). At this current stage, the focus of the KIP INCA is on ecosystem service (flow) valuation.
3.1 Exchange and welfare value concepts
One of the contested topics in the context of valuation methods for natural capital accounting has been the adequacy and relevance of the exchange value and welfare value concepts. It has been argued that for SEEA EEA the chosen value concept can only be exchange value, in order to allow integration of the values of stocks and flows related to the man-made capital with the values of natural capital (e.g. SEEA, Obst et al 2015).
National accountants focus on exchange values or as Obst et al (2015) put it “the value at which goods, services and assets are exchanged regardless of the prevailing market conditions”. In the case of ecosystem services, for which markets often don’t exist, exchange values essentially represent an assumed transaction between an ecosystem asset and economic units, or “the monetary value of the ecosystems to economic production and consumption” (SSE EEA 2017 6.59). In the figure below, the exchange value concept is represented by producer surplus (area B) and cost of production (area C). This is equal to P* times Q*, market price of a good/service and its consumed quantity. Using the exchange value concept is convenient for national accounting as it allows consistent recording of (assumed) transactions in national accounting, since the values for supply and use are the same. At the same time, for most of the marketed goods the data is readily available. For ecosystem services, most of which are not traded in the market, these values need to be imputed (however, note that value imputation is already used for health, education or intermediate financial services in the SNA).
In contrast, the welfare value concept and welfare analysis is related to the changes in consumer surplus (area A), relative either to market or shadow price. The consumer surplus area represents the difference between consumers’ full willingness to pay and the price they actually pay which is typically smaller. For many policy analyses and decisions, it is the welfare value concept that is of relevance. The welfare value concept underpins EU Cost Benefit analyses guidelines (e.g. Sartori et al. 2014) and the majority of the studies analysing the values of ecosystem services are based on the shadow or welfare value concept.
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Figure 2: Supply and Demand for ecosystem related goods and services
We argue that some degree of pragmatism is reasonable when choices are made on valuation methods and estimates. It is our opinion that while the exchange value concept is relevant for national accounting purposes, it should not be the only consideration for the EU natural capital accounts. The choice of valuation approach and methods is dictated by the aim of natural capital assessment (see SEEA EEA 2017). So if the sole purpose of constructing natural capital accounts in the EU is to integrate the ecosystem values with SNA, it might be necessary to only use the exchange value concept (e.g. Obst et al. 2015). But other accounting practice options might be considered, especially if the ‘new’ accounts are satellites to the main national accounts and the primary aim is to highlight the contribution of the environment (ecosystems) to economic progress. Similarly, some accounts might serve a specific policy goal and hence need a broader concept of value (e.g. assessment of the contribution of national parks to societal welfare).
As a practical example UK ONS (2017) suggests that in situations where the exchange values cannot be imputed it might be feasible to use welfare values, assumed as exchange values (i.e. retaining use and supply values). This would provide an overestimation of the exchange value and would need to be clearly noted in the accounts construction. Further, in cases where the difference between the two value concepts might be significant, it could be useful to attempt to report both value types, however how this could practically be achieved would need to be clarified (ibid). We would argue that rather than assuming welfare values as exchange values it would be perhaps more useful and transparent to produce satellite accounts which, by definition, can be more flexible in terms of what values can be incorporated. The goal of the satellite accounts would in this context be to emphasise the contribution of environmental assets and services to economic development/progress, as well as to give some signals on sustainability.
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The information organised and collected in the physical and monetary accounts could also be used for purposes other than national accounting, such as policy evaluation, management decisions or advocacy purposes. For example, Costs Benefit Analyses that underpin a number of key EU policies and programmes (e.g. investment projects within cohesion policy 2014-2020) use welfare value for assessments. Further, it might be of interest to policy makers to develop wealth accounting in order to assess its progress in sustainability. In this case, exchange values are augmented by shadow prices of natural capital assets13.
What distinguishes actual exchange value is that it does not assume any institutional arrangement by accepting the institutional arrangement in which the transaction took place. As Atkinson and Obst (2016) note this is not a neutral position, since accounting does not make any judgement about what the institutional arrangement should be. As such, using both exchange and welfare values in satellite accounts derived under different institutional arrangement can help to measure progress towards (desired) policy targets.
Ecosystem services are in many cases associated with non-use values. People may value the continued existence of species and ecosystems for themselves, for others or for future generations (i.e. existence, altruistic and bequest values, respectively). This component of value might in some cases be significant. It is not yet clear how to capture non-use value within an accounting system, as these values are generally captured through methods based on the welfare value concept and stated preference valuation methods reliant on surveys14.
Given that the current stage in the EU natural capital accounting process is experimental, we believe different approaches are still open for debate and should be explored in a pragmatic process. However, it is also expected that the policy utility focused work stream in this project (prepared by IEEP) is likely to shed more light on the policy demands for the KIP INCA outputs which might help to select appropriate value concepts and valuation methods.
3.1.1 Simulated exchange values
An emerging method of simulated exchange values potentially provides an opportunity for using stated preference methods to derive exchange values. Caparrós et al (2003) proposed the method and Caparrós et al (2015) further describe this method and
13 In a perfect competitive market, we acknowledge that exchange and shadow value for accounting purposes will be the same as the marginal value that will be P*. However, we argue that markets or quasi-markets for ESs are far from “perfect”. 14 More fundamentally, the issue about the incorporation non-use values might be about the physical accounting units to use for multiplying the potential estimated price.
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apply it to free access recreation services in Spain. The method estimates demand for a service, using non-market valuation methods, and models the whole market - the demand against the supply of a service under different market structures. In their application, Caparrós et al (2015) derive the demand function from a stated preference survey and for the supply curve of the service they survey public servants for an understanding of the cost associated with the provision of free access recreation. The exchange value/price can then be found at the intersection between the demand and supply curves.
A lack of research is available related to this approach to make it truly operational. Further work is required to explore to what extend the method provides an option to use existing evidence from stated preference literature to derive values compatible with the exchange value concept and national accounts. Further, it is important to consider the efforts related to understanding the supply of the services as well as the assumptions used in implementing this method (e.g. assumptions related to the shape of the demand function). From our view, as of yet, this approach either requires a number of bold assumptions or very detailed dataset and/or effort in survey on the demand and supply for the service.
3.2 Valuing flows – ecosystem services
Valuing flows in the context of extending or/and integrating natural capital into SNA, implies valuing final ecosystem services. While the biophysical definition of ESs often refers to provision, regulating, cultural (e.g. CICES15) and supporting (MA 2005) services this classification needs to be further adapted for economic assessment (e.g. Fisher and Turner 2008). There are flows of ecosystem service between ecosystem assets (i.e. intermediate or supporting ecosystem services), but for the construction of monetary ecosystem services accounts, only final ecosystem services should be accounted for and valued, otherwise double counting might occur (Fisher et al. 2009).
Nevertheless, recent discussions have highlighted the need to account for the intermediate ecosystem services (functions) in order to understand interdependencies between ecosystem assets and to answer particular policy questions (e.g. SEEA EEA 2017 1.71, 1.72; 5.40 - 5.43). Indeed valuing intermediate ecosystem services can provide valuable information for cost effectiveness and other management decisions (e.g. restoration of ecosystems, conservation interventions etc.), but it is essential that the intermediate and final services are clearly distinguished. Only final ecosystem services can be the focus of the ecosystem use and supply accounts in the SNA/SEEA EEA or double counting can occur.
15 The Common International Classification of Ecosystem Services (CICES) – see https://cices.eu/
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Satellite accounts can be used to highlight the contribution of intermediate ecosystem services that are valuable for the functioning of natural capital which produces the final ecosystem services outcomes which are already accounted for in the SNA (e.g. pollination for agricultural production). There may also be cost-effectiveness decision making contexts in which it is valid to compare an ecosystem service alternative with a man-made capital facility i.e. comparing natural wetland water purification with the construction of a treatment plant, given an institutional context in which water quality legal standards are in force.
At the EU level, valuing chosen ecosystem services will depend on the data available and the goal of the particular account(s). As discussed above, different valuation concepts might be relevant in light of the goal the account should serve.
The valuation methods that can be used in the context of SEEA EEA (i.e. based on exchange value concept) are classified in:
Market-based or cost-based methods
Unit resource rent Production function, cost function and profit function methods Replacement cost Damage costs or defensive expenditure Averting behaviour Payment for Ecosystem Services (PES) schemes
Revealed Preference methods
Hedonic pricing Marginal values from travel cost demand functions (simulated exchange)
Whether the intention of accounting is to complement/extent SNA with satellite information, or to move to wealth accounting other valuation methods can be considered, such as:
Stated Preference methods
Contingent Valuation Choice experiment
Extensive literature is available on the theory and application of methods in context of valuing preferences for ecosystem related goods and services and we recommend these for
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further detail16. In the following sub section we will focus on the specifics of valuation methods for natural capital accounting.
Many of the methods listed above require extensive data and statistical expertise (e.g. hedonic pricing), existing markets (e.g. PES); or detailed biophysical/scientific understanding (e.g. Production function) to make the method practically applicable. Use of existing valuation results, particularly for the KIP INCA project, might be needed.
In the case of market-based price values, usage should be conditioned by the prevailing institutional arrangements (e.g. degree of competition in the market), and should not include non-ecosystem inputs (reproducible man-made capital).
Resource rent approaches (which is estimated as the difference between the benefit price and the unit costs of labour, produced assets and intermediate inputs) are most suited to so-called provisioning ecosystem services but again much depends on the prevailing market structures (e.g. subsidies might obscure the “true” exchange value). Another potential approach would be to try to discern a production function and the contribution to it made by an ecosystem service (typically provisioning and some regulating services). Physical science and data gaps, and the existence of non-market values can complicate any production function estimation. Given a pragmatic strategy, a possible alternative proxy approach could be replacement costs or damage costs methods. The complications with this proxy approach include the correct identification of the beneficiaries, and their actual incurred costs. In other cases, avertive behaviour purchasing (or defensive costs) may provide useful value estimates.
Hedonic pricing methods (which generally look at the variation in housing prices to assess the value of local environmental attributes) are linked to market-based transactions but require large data sets with spatial variation. Further it is sometimes difficult to disentangle the ‘bundle’ of ecosystem services that may be represented by for example residential property prices.
Travel cost methods (which use travel expenditures to a site/good, in terms of financial and time costs, to assess good/site’s value) have been greatly refined over the years due to the increased use and capability of Geographical Information Systems (GIS). However the values they yield include welfare value (time) and other components which are already included in national accounts. An alternative proxy approach could be to rely instead on raw
16 See e.g. Badura et al (2016) (available for download) for a short overview, Bateman et al (2011) for theory and policy context for ecosystem service assessments and Freeman et al (2014) for a thorough theoretical and practical discussion of valuation methods.
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travel cost (mean or median) data from surveys perhaps differentiated by day trip and longer stay visits. In cases where there is an entry price to the facility/area this is a willingness to pay measure. In satellite accounts travel cost measures could provide useful supplementary information highlighting the contribution of the ecosystem service (recreation) to among other things human wellbeing.
Stated preference methods (contingent valuation or choice experiments) based on participant surveys (where individuals provide answers about choices related to environmental change or their willingness to pay for any such changes), are the best option for non-use values related to feasible transactions. However, care needs to be taken since these methods are often based on the welfare value concept, although they can be designed to capture only market based values. They may also have a role to play as a cross checking device.
Recent discussions and literature (Freeman et al 2013, SEEA EEA 2017, Atkinson and Obst 2016) have highlighted the possible usefulness of looking at the economic channels through which ecosystem services affect human wellbeing. This categorisation recognises three broad ecosystem service types:
ES#1, intermediate services which input in the production system along with other producing factors ES#2, final/intermediate ecosystem services which provide benefits to households as complementary (or substitute) of marketed goods and services ES#3, final ecosystem services which directly contribute to household wellbeing.
This distinction can be useful for classifying methods for ecosystem service valuation in a manner that is relevant to national accounting thinking, due to its explicit consideration of users of the services. .Building on the discussion in section 2 of the report, we indicate the links between service users and the three broad approaches to natural capital accounting:
1) Approach 1: development of SNA compatible natural capital accounts that will fully follow SNA conventions and restrictions on what the accounts measure and how. 2) Approach 2: development of Satellite natural capital accounts that can provide complementary information to SNA accounts and hence allow certain flexibility and fit-for-purpose design, including use of different value concepts. 3) Approach 3: development of comprehensive Wealth accounts. Requiring an extensive range of shadow pricing and wellbeing information.
Under Approach 1: ES1 services such as waste disposal and water quality, have values that are implicitly encompassed within economic production and as such are already included in SNA accounts. But valuation via exchange prices and production functions
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could add to information on the service’s contribution to final services. ES2 benefits fall into two sub categories, in the first households purchase a good which has an ecosystem service level condition associated with it e.g. local air quality or amenity. This group is already included in SNA accounts via for example the property market. The second sub category households choose a level of ecosystem service through their purchase of a complementary market good, for e.g. recreation valued by travel costs and these will add to conventional GDP. Finally ES3 services, non-use services, are excluded from SNA accounts because exchange values are not available, only stated preference methods can be used in this context.
Under Approach 2: all three ES1, ES2 and ES3 services could be quantified and valued directly, or their supply contribution to final services assessed. Under Approach 3: some variant of an inclusive wealth index would seek to encompass all the service categories and other wellbeing components such as health and education.
Table 1 provides different perspectives on the methods that can be used for natural capital accounting in light of the three strategic (1, 2 and 3) approaches to natural capital accounting. It provides examples of methods that can be potentially used for valuing individual ecosystem service flows within the context of KIP INCA. Please note that further detail on this is to be explored in light of testing of the approaches over the course of KIP INCA actions, and that the entries in the table are subject to further assessment. Table 2 provides examples of valuation methods that can be used to assess ESs considered by JRC.
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Table 1: Valuation methods for different ESs accounting strategies Category Explanation Examples of Link to national Valuation Valuation methods Valuation methods from economic ecosystem accounting perspective methods for for supplementation for wealth accounting perspective services integration of SNA with satellite SNA accounts ES#1 ESs as input to Nutrient cycling, Value of ecosystem Market/cost-based economic water regulation, service is implicit in the methods (e.g. No extra methods production water value of economic production function, required purification, crop production as avoided costs) pollination measured in standard national accounts (e.g. in conventional GDP). ES#2 ESs as joint Amenity value, Some values of Market/cost- Revealed Preference Stated Preference inputs to final purified air, ecosystem service are based methods methods or methods such as consumption recreational already reflected in (e.g. production market/cost-based contingent valuation, activities, flood household function) methods (e.g. hedonic (discrete) choice protection consumption as pricing in property experiment measured in standard markets, travel cost, national accounts (e.g. damage costs) in conventional GDP) others provided extended benefits (non- SNA benefits). ES#3 ESs as direct Carbon storage Value of ecosystem Simulated Simulated Exchange Stated Preference input to service is not associated Exchange values or stated methods such as households with any purchase of a values preference methods contingent valuation, wellbeing market good (discrete) choice experiment [Source: Adapted from Freeman et al. 2013 and Atkinson Obsts 2016]
Table 2: Main Ecosystem services considered by JRC, environmental valuation methods and accounting strategies
Extension/Integration of ESs as satellite ESs for wealth ESs into SNA information accounting
Valuation concepts Based on Exchange prices Based on Exchange Wider set of welfare prices and/or welfare values values
ESs [from JRC Notes on ES report] (Classification)
TERRESTRIAL
Arable cropping Managed arable crops require intense Production function Production function Contingent Valuation modification and human activities to realize (Intermediate) Resource rent Resource rent famers’ economic gain that cannot be defined as true ESs (although we acknowledge that ESs Avoided costs Avoided costs Choice experiment provide free gain to farmers). It would be relevant to consider all main arable crops for Benefit transfer of Benefit transfer of this ES (e.g. cereals, energy crops, sugar beets, avoided costs avoided costs Benefit transfer vegetables, fruits…) Contingent valuation or Unmanaged arable crops are more natural but choice experiment harvesting is still needed to produce benefits, this ESs are ignored in this report.
Outdoor animal The ecological contribution to the outdoor Adjusted Market price Adjusted Market price Choice modelling rearing of domesticated animals that can be
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husbandry used for the production of food. The outdoor Replacement costs Replacement costs Benefit transfer rearing of animal provides higher organoleptic (Intermediate) Resource rent Resource rent properties of food and better quality of life to
animals. Contingent valuation or choice experiment
Timber The ecological contribution to the growth of Adjusted Market price tree for timber production. (Final) Resource rent
Crop pollination Movement of floral gametes for reproduction Production function Production function Contingent valuation of plants thanks to wild bees and pollinators. (Intermediate) Replacement costs Replacement costs Choice experiment
Adjusted Market price Adjusted Market price Benefit transfer
Contingent valuation or choice experiment
Erosion control Retention of soil within an ecosystem Avoided costs Avoided costs Hedonic price
(Final) Replacement costs Replacement costs Contingent valuation
Benefit transfer of Contingent valuation or Choice experiment avoided costs choice experiment Benefit transfer
Outdoor recreation The natural amenities which provide recreation Resource rent Resource rent Contingent valuation opportunities for human beings. (Final) Production function Production function Choice experiment
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choice experiment Travel cost
Travel cost or hedonic price Benefit transfer
MARINE
Marine fish Wild fish species that can be harvested and Adjusted Market price Adjusted Market price Choice modelling used as food. Harvesting is still needed to (Final) Residual Resource rent Residual Resource rent Contingent valuation produce benefits out of this ESs. Contingent valuation or Travel cost Choice experiment Benefit transfer Travel cost
Benefit transfer
FRESHWATER
Water purification Removal or breakdown of excess nutrients of Replacement costs Contingent valuation Contingent valuation compounds in water (Intermediate/Final) Resource rent Choice modelling Choice experiment
Payment for ecosystem Fiscal instruments Benefit transfer services Payment for ecosystem services
Benefit transfer
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Water provisioning The provision of water flow for human uses Adjusted Market price Adjusted Market price Contingent valuation can produce several benefits (e.g. bottle water) (Intermediate) Resource rent Resource rent Choice experiment
Payment for ecosystem Payment for ecosystem Benefit transfer services services
Replacement cost Replacement cost
Contingent valuation or choice experiment
Flood control The natural control of water flow in rainy Adjusted Market price Adjusted Market price Hedonic price season. (Intermediate) Avoided cost Avoided cost Contingent valuation
Contingent valuation or Choice Experiment choice experiment Benefit transfer
OTHERS
Avoided health cost Hedonic price
Air purification Removal or breakdown of excess nutrients of Avoided health cost Replacement cost Contingent valuation compounds in the air (Intermediate) Replacement cost Contingent valuation or Choice Experiment choice experiment Benefit transfer
Global climate Maintenance of stable and sustainable air Adjusted Market price Adjusted Market price Contingent valuation regulation gases combination
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(Final) Replacement cost Replacement cost Choice experiment
Payment for ecosystem Payment for ecosystem services services Benefit transfer Fiscal instruments
Contingent valuation or choice experiment
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3.2.1 Valuing pollination17
Crop pollination is an intermediate ecosystem service and hence should not be confused with final service supply. Importantly, crop pollination is already included in the income estimates provided by the SNA through the value of crops traded in the markets (ES#1). The contribution of ecosystem assets to this production should be assessed through final ecosystem service Cultivated Crops, following the hierarchical structure provided in the Common International Classification of Ecosystem Services (CICES) - Nutrition, Biomass, and Cultivated Crops. Crop pollination is an intermediate ecosystem service that acts as an input to production of crops. As such a crop pollination account will not impact GDP, but could be constructed in order to better understand the contribution of pollination to crop production that is already accounted in the SNA (and GDP). Note that pollination in general terms also contributes to other benefits, such as ornamental flowers, or wildflowers and wild foods. In this context pollination might impact on people’s cultural enjoyment of the landscape and hence methods ES#2 and perhaps ES#3 might be more appropriate. Consideration might be given to value pollination in this broader context, depending on the final objective of the pollination accounts.
As raised previously, the purpose (i.e. which accounting approach) of the valuation exercise needs to be identified in order to select the theoretically and practically most appropriate valuation method. It is assumed that the interest in developing the crop pollination accounts is essentially in raising the importance of pollination for crop production and therefore of particular components of ecosystems for management or advocacy purposes. However, note that if the goal is advocacy for e.g. protected areas, field margins or other conservation interventions related to pollination, it is likely that the welfare value concept might be of more relevance. Such focus might be more closely aligned with project evaluation using CBA instead of accounting.
NOTE: Clear understanding of the objectives for valuing crop pollination are essential for selection of valuation method.
Recent years have seen an increased interest in understanding pollination services (IPBES 2016) and valuing pollination services (e.g. Hanley et al. 2015, Breeze et al. 2016). The empirical evidence of the value of pollination services is still scarce, heterogeneous and varies geographically and only partially inform management and policy (Breeze et al. 2016). Most of the literature focuses on the contribution of pollinators to agricultural production.
A number of approaches can be distinguished for valuing pollination services. Dependency ratios and yield analyses aim to calculate the portion of the production that can
17 This report forms a basis of Technical Support Action to Joint Research Centre’s efforts to value crop pollination and recreation services. be attributed to pollination either based on the literature review and expert consultations (e.g. Klein et al. 2007) or from direct field experiments (e.g. Garratt et al. 2014, Klatt et al. 2014). These methods often omit other factors that influence crop productions, such fertilisers and other production inputs, that might lead to overestimation of the benefits. More complex production function approaches have been proposed (e.g. Hanley et al. 2015). These aim to estimate a function that reflects the various inputs to crop production where pollination represent one such input, effect of which can be isolated and hence valued. This method requires detailed understanding of the crop production process and high quality data. Further, some studies use cost of replacement to value pollination services with technology (e.g. Allsopp et al. 2008) or using the rental costs for managed honeybee pollination (e.g. Rucker et al. 2012). The approach based on costs of replacement of ecosystem services has been criticised in the literature as these costs might in some cases bear little resemblance to the value of actual benefit and should be used with caution (e.g. Barbier 2007, Melathopoulos et al. 2015). All the above techniques often simplify the impact of pollination loss on welfare, as they disregard effects of prices and crop markets – they do not capture the impact of pollinators on producer and consumer surplus. Some recent studies attempted to do so (e.g. Gallai et al. 2009, Bauer and Wing 2016). Each of the approaches to value pollination services have their strengths and weaknesses (see Table 3 below), however it is mostly data availability that dictates which methods can be used in a given context.
Notwithstanding the purpose for the construction of crop pollination accounts, the following data is anticipated for the construction of monetary crop pollination service accounts, as a minimum requirement:
Location of agricultural lands that is in proximity to land covers that provide pollination services, with detailed data on the cultivated crops in the areas concerned, yields of these crops and the prices paid for these crops (from SNA) An understanding of the composition and abundance of the pollinators in each areas/locations/habitats adjacent to crop fields, as well as pollination interaction relationship of each species with each crop, including species visitation ranges. Other data might be relevant for accounting purposes, in particular the replacement costs in terms of both manual pollination expenses or costs of using managed pollinators. Similarly, it might be useful to have data that allow an understanding of the various factors that influence crop production that would allow to isolate the contribution of pollination from other factors influencing crop production.
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Table 3: Methods for valuing pollination services (adapted from Breeze et al 2016) Category Method Explanation Strengths Weaknesses NCA Approach REF
Estimates only producer benefits; Portion of the total market price of Captures benefits across different might generalise across crops; crops times the dependency ratio (how crops; Does not account of of other inputs to Klein et al. Dependency ratios 1 & 2 much production would be lost if there Applicable at all scales; crop production; (2007) would be no pollination) Minimal data requirements Assumes pollination services at maximum levels
Only for local scales; Ricketts et Directly measures benefits of Require extensive planning and al. (2004) Field studies that allow analysis of crop pollination; Garratt, Market resources; Yield analysis production of pollinated versus non- Captures specific variations across 1 & 2 M.P. et al. based Does not account for other inputs to pollinated patches of land crops; (2014) methods crop production; Can capture marginal benefits Klatt et al Estimates only producer benefits (2014)
Can be used for accounting; Estimates a mathematical relationship Captures the benefits of Requires detailed data and biophysical between the different inputs to crop pollination relative to other understanding; N/A discussed production. This allows separating the inputs; Can be complex to estimate and 1 & 2 Production function in Hanley role of any input in particular, such as Can be used for other locations; require sufficient datapoints et al (2015) pollination. Can accurately assess the value of Estimates only producer benefits pollination services
Using information on costs of managed Replacements may not be effective; Managed Rucker et pollination to assess the value of wild Assumes producer's willingness and pollination al. (2012) pollination. Replacement costs used in ability to pay for replacement; Replacement national accounts; Not necessary linked to benefits from 1 & 2 costs Using information on costs of Apply at all scales pollination; Technological technological pollination (e.g. manual Not linked to crop prices; Linked to labour and input prices; Allsopp et pollination or machine) to assess the value of wild Not reflecting price changes and al pollination. impacts Contingent Estimates welfare values; Surveys where individuals provide Can be used to value non-use Resource intensive (time, expertise, Breeze et al. valuation answers about choices related to values; (2015) Stated costs); environmental change or their Could be used to value any 2 & 3 Narjes and preferences Require high quality sample of willingness to pay for any such hypothetical situations; Lippert Choice modelling respondents; changes. Not linked to market prices; (2016) Complex to analyse; Partial equilibrium models the impact of the welfare value Can assess both consumer and Extremely complex and resource Gallai et al Modelling 1, 2 & 3 models of changes to market(s) due to producer surplus; intensive (knowledge, resources); (2009) pollination service change Captures effects within and across Requires detailed biophysical Bauer and markets; understanding; Wing (2016) General Can be applied at different scales Assumes that pollination services are equilibrium models at current levels
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3.2.2 Valuing recreation services18
Tourism is a fundamental component of European countries economies and since 2000 EU has launched different initiatives to monitor tourism activities. Satellite accounts have been set up by EU and individual countries to monitor tourism impact on the economy. Despite this early interest in tourism activities the scientific community have only recently started acknowledging the contribution of natural capital to tourism activities.
Given different land use types and ecosystem services, human beings can benefit from multiple recreational opportunities. Normally, to benefit from these ESs households need to acquire complementary market goods and services (ES#2). These can be represented by recreational equipment, entrance fees and travel expenses. Natural tourism can be classified either as SNA benefits (represented by already accounted for expenses), or as non-SNA benefits including all intangible benefits provided to human beings.
Freeman et al (2013) suggest using nature-based expenditures (e.g. membership of conservation organizations, magazines, etc.) to assign exchange prices consistent with SNA. Although, this approach sounds attractive these expenses might not represent the most appropriate valuation approach and are open to challenge. Remme et al. (2015) attempt an estimate of recreational SNA benefits for Limburg province. They collected local area data covering total revenues, labour costs, accommodation and catering sectors costs, differentiating North, Centre and South of the province. Subsequently using a resource rent approach the average tourist expenditures for the three zones was spatially distributed to nature-based recreation areas. Remme et al’s approach is a data intense exercise and the final output is satellite information on nature-based tourism.
An alternative approach to account for nature-based tourism is the travel cost method which is based on the financial expenses generated by recreational activities (Atkinson and Obst 2016). This method mainly captures fuel costs associated with visiting recreational sites and it has been widely tested and developed in environmental economics. While the method can potentially capture exchange and welfare values attention is needed in reporting the appropriate accounting measure. When the aim is to integrate data into SNA accounts, only exchange values are relevant, and all financial expenses generate by recreational sites travel (equipment, fuel costs, etc.) are already accounted for in the SNA and the final effect on GDP will be null. By contrast, if satellite information or wealth accounting are the objective of valuation, either exchange or welfare values can be considered. In particular, welfare values
18 This report forms a basis of Technical Support Action to Joint Research Centre’s efforts to value crop pollination and recreation services. can capture the value of time and wider welfare benefits generated by the natural environment.
For accounting purposes the following data is anticipated as crucial:
Location of different land use types which can provide recreational opportunities as open green spaces, forest, water course etc. An understanding of the composition of recreational sites as a bundle of different ESs with a broad categorization in high, medium and low provisional sites. Other data on population density, distance to recreational sites and socio- economics characteristics of the population to be used to derive a trip generation function which will signal the economic attraction of the area.
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Table 4: Methods for valuing recreation services
NCA Category Method Explanation Strengths Weaknesses Approach REF Is estimated as the difference between the Influenced by the property rights It is compatible with the Market Unit benefit price (e.g. total tourist revenues and market structures; Remme SEEA/SNA approach; based Resource for the area) and the unit costs of labour, In some cases (esp. open access 1 & 2 et al Relatively well established Rent produced assets and intermediate inputs cases) might lead to negative 2015 methods approach that allow recreation benefit to occur. residual rents; Requires extensive resources in terms of expertise/knowledge, Measures the implicit price of an analysis, data and time; requires ecosystem service related good as Compatible with the SEEA/SNA large data sets; revealed in the observed price of an approach; It might be difficult to dissentangle Hedonic associated, market priced good. Common Theoretically sounds method, Day et al recreation opportunities from other 1 & 2 pricing application is estimation of accepted by economists; 2007 environmental goods and services; environmental quality (e.g. access to local Already used in SNA for pricing Might depend on availability of recreation opportunities) from property of computers. subsitutes and/or complements; Revealed market prices. Is specific to the property market preferences analysed. Complex to determine the actual Through analysis of travel expenses in Relatively frequently applied contribution of an ecosystem to the terms of actual travel costs, time costs and and accepted method; total willingness to pay; Whiteley Travel cost admittance fees it is possible to assess the Could provide exchange values Method is varied in the literature 1, 2 & 3 et al method implicit price of access to the recreation (if the cost of time is not taken with different techniques and (2016) site and incur the value of recreational into account) and welfare values assumptions; benefits. (if it is); It is difficult to account for different habitats and types of sites; Contingent Estimates welfare values; Can be used to value non-use valuation Surveys where individuals provide Resource intensive (time, expertise, values; Stated answers about choices related to costs); Could be used to value any 2 & 3 preferences Choice environmental change or their Require high quality sample of hypothetical situations and experiments willingness to pay for any such changes. respondents; attributes of such change; Complex to analyse;
3.3 Stock valuation – monetary asset accounts
Following SNA’s approach for situations where there are no markets for assets that could be used for estimating their values, the SEEA uses an Net Present Value approach for estimating ecosystem asset values (e.g. SEEA EEA 2017, 6.8.). Two valuation steps result from this premise for the construction of monetary ecosystem asset accounts. First, individual ecosystem services from an individual ecosystem asset are assessed and valued based on principles outlined above in terms of their use and supply. Second, the expected future income flow of a basket of ecosystem services from an ecosystem asset is discounted to the present. This calculation aims to capture the stock of ecosystem assets at a point in time – given seasonal variation for some ecosystem assets this would be done for average ecosystem condition over a year, for other at a specific time of a year.
The NPV asset valuation method assumes detailed knowledge and/or bold assumptions. The NPV is likely to depend on the condition of the ecosystem and its natural regeneration, however it is calculated on the basis of current patterns of use (Hein et al 2016). Further NPV calculations require an understanding of the likely pattern of supply of the ecosystem assets and interactions between individual services. Key decisions need to be taken regarding the use of discount rates and assumed asset life. Most environmental economists agree that for environmental long lived assets a discount rate based on market rates is not appropriate. Markets are essentially driven by short term considerations. So for ecosystem assets a capacity and accounting lifetime of 100years seems reasonable, together with a declining discount rate such as that adopted in the UK, based on the Ramsey formula (e.g. ONS 2017). A particular challenge is forecasting expected ecosystem service flows, especially in case of unsustainable use of ecosystem asset.
Further complication arises from using the values of ecosystem services derived for at a point in time for extended periods. The valuation of ESs implicitly assume that ESs values reflect
current magnitude of ES flows, currently available substitutes, current institutions (e.g. property rights regimes, access restrictions, etc.) current technology (whale oil not so valuable in a world with electric lights, copper is less valuable now that we have fibre optic cable, etc.) current individual preferences (views on littering, killing whales, etc. change over time)
However, all these factors are unlikely to stay constant over prolonged periods of time, as assumed in the NPV asset valuation. Indeed, this assumption is implicit in many NPV calculations for other purposes, such as CBA, however need to be acknowledged. Recent discussions (in particular Hein et al 2016 and SEEA EEA 2017) have highlighted the importance of concepts such as capacity, capability and potential supply19 for understanding (and accounting for) ecosystems as assets. Capacity might provide another important way to provide monetary assessment of ecosystem assets, however this will likely differ from the NPV approach and might present complementary information that improves the understanding of ecosystems as assets. The natural capital unlike man-made capital can regenerate itself and this growth capacity could be integrated in the economic assessment exercises providing more reliable values, especially when the impact of “scarcity effect” on resource price can be accounted for as in Fenichel and Abbott (2014). Ignoring this feature of natural assets and focusing all the attention on annual flows can produce inconsistency in natural capital accounting. However this ambitious target broadly discussed in Hein et al (2016) suggests a stronger need to integrate biophysical and economic analysis.
Fenichel and Abbott (2014) and Fenichel et al (2016) have recently proposed a framework for estimating prices of natural capital assets. The approach builds directly on capital theory and sets out an asset pricing function that accounts for biophysical and economic feedbacks and institutional setting of specific natural capital stock to estimate its price (see an example and Box below for further details). These feedbacks reflect an observation (similarly to Hein et al. 2016) that while valuing ecosystem service flows is an important component of ecosystem asset valuation, it is not the only determinant of the asset value. Ecosystem service flows need to be combined with biophysical, social and economic data to derive long run value of natural capital assets that also reflect their sustainability. This is in contrast to the NPV approach used in SEEA EEA that values ecosystem assets in view of current use patterns, disregarding sustainability of this use. The Fenichel et al (2016) approach, while requiring availability of detailed data, represents a promising theory-driven avenue for estimating the price of natural capital assets that could be particularly useful to wealth accounting, and the monitoring of stock sustainability.
19 “Capacity relates to sustainable use levels of multiple ecosystem services, capability involves prioritising the use of one ecosystem service over a basket of services, and potential supply considers the ability of ecosystems to generate services regardless of demand for these services.” Hein et al. (2016)
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Fenichel et al (2016) demonstrate their approach by valuing groundwater in Kansas High Plains Aquifer over the years 1996-2005. They calculate a significant decrease (of
Box 2: Stock valuation approach in Fenichel et al. (2016) PNAS
The study present a framework for pricing natural capital assets, as summarised in the figure below. The framework recognises that the policy and institutional context and state of natural capital stocks influences human (consumption and/or investment) behaviour that, in turn, has an impact on the flows of (ecosystem) services, as well as on the stock of (ecosystem) assets. Theses conditioned behaviour rules are termed economic program and represent actual conditions rather than assumed conditions in a theoretical markets.
Further the framework allows calculating unit costs of capital (Grey box). This is calculated as a ratio of changes in flows of services together with estimated capital gains, over discount rate adjusted by the changes in stock of capital. Using the unit price of capital can be then used for wealth accounting purposes.
approx. $110 million per year in 2005 US dollars) in the value of the Aquifer over the ten year period – an amount that is equal in size to Kansas 2005 budget surplus (approx. $110 million per year in 2005 US dollars). This application shows that valuing natural capital assets in this way might help understanding the relative scale of natural capital depletion. Pricing natural capital assets in the way presented in this study is useful - the price indicates scarcity and hence the sustainability of asset use. The application also highlights the joint effect of technology and institutional arrangements on natural capital prices. Their price functions reflect the impact of the subsidised technology that, while increasing effectivity of water usage, led to an absolute increase in water withdrawal.
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4 Key messages
Natural capital accounting is the subject on ongoing debate with a range of candidate accounting frameworks on offer. A degree of pragmatism seems a reasonable strategy given the controversy. It is important to clearly differentiate between the accounting approaches on offer and highlight their primary policy objective(s), nevertheless they will also form a complementary set of components in an overall sustainability knowledge base. For simplicity, three approaches have been categorised to represent the spectrum of natural capital accounting frameworks: o Limited extension of national accounts more or less linked to the SNA to measure economic activity (Approach 1); o Compilation of satellite accounts (physical and monetary) to provide fuller information on the environmental impacts of economic activity (Approach 2); o Compilation of comprehensive welfare accounts to address strong sustainability issues (Approach 3). The generic approach adopted will to a certain extent condition the range of appropriate value concepts and valuation methods and techniques. For SNA related accounts, exchange values for final ecosystem services will be the dominant concept. For satellite accounts more flexibility can be appropriate, highlighting the role of intermediate ecosystem services assessment, and more value concepts and methods, depending on the specific purpose of the account(s). A clearer distinction needs to be observed between natural capital asset valuation (stocks) and ecosystem services valuation (flows). This clearer distinction would particularly help in the assessment of the sustainability of the natural capital use. Recent work on capital asset valuation (stock pricing) merits further attention. Possible ways forward: o Approach 1 – future progress could focus on extending the data base for ecosystem services production function relationships. It may also be possible to discern similar supply relationships and quasi exchange values through the use of economic externality theory. The recent efforts to calculate natural capital stock prices and then to monitor price changes over time, also holds some promise, although the number of contexts in which the approach is tractable may be limited. o Approach 2 – our suggestion would be to keep it as a distinct set of satellite accounts without the push for integration; so it is most flexible and fit-for- policy-purpose; including resource supply security risk analysis and
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threshold effects warning. The set of accounts could then provide a mirror environmental reflection over a given period of time of changes in GDP. o Approach 3 – Wealth accounting is essentially the only approach to monitor strong sustainability progress on an individualistic and monetised basis. Given the formidable shadow pricing requirements across a wide range of wellbeing components, critics have suggested alternatives based on biophysical and socio-economic analysis for sustainability standards and gaps. Others recommend cost-based environmental sustainability analysis. These suggestions could form part of the set of data under Approach 2. Good quality data lie at the heart of any approach to natural capital accounting and will define it usefulness. o In some cases existing data need to be made more freely available, in others new data could be collected through existing national and European initiatives, or new data focused efforts. Experimentation should be encouraged with different approach and methods. o Comparison of the different approaches to natural capital accounting on a number case studies would be helpful. o Similarly valuation assessments employing welfare and exchange values in the same case studies would be useful. o Ideally, case studies based on large ecosystems (e.g. The Alps, Białowieża Forest, etc.) in several countries could serve this purpose; starting with high profile/importance ecosystems and/or linked to pressing policy problems.
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5 Bibliography
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European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank (2009) System of National Accounts 2008. United Nations, New York Fenichel, E. P., & Abbott, J. K. (2014) Natural Capital: From Metaphor to Measurement. Journal of the Association of Environmental and Resource Economists, 1(1/2), 1–27. http://doi.org/10.1086/676034 Fenichel, E. P., Abbott, J. K., Bayham, J., Boone, W., Haacker, E. M. K., & Pfeiffer, L. (2016) Measuring the value of groundwater and other forms of natural capital. Proceedings of the National Academy of Sciences of the United States of America, 113(9), 2382–7. http://doi.org/10.1073/pnas.1513779113 Fisher, B., & Turner, R. K. (2008) Ecosystem services: classification for valuation. Biological Conservation, 1(2007), 8–10. Retrieved from http://www.sciencedirect.com/science/article/pii/S0006320708000761 Fisher, B., Turner, R. K., & Morling, P. (2009) Defining and classifying ecosystem services for decision making. Ecological Economics, 68(3), 643–653. http://doi.org/10.1016/j.ecolecon.2008.09.014 Freeman III, M. A., Herriges, J. A., & Kling, C. L. (2014) The Measurement of Environmental and Resource Values: Theory and Methods. RFF Press; 3 edition (June 5, 2014). Gallai, N., Salles, J.-M., Settele, J., & Vaissière, B. E. (2009). Economic valuation of the vulnerability of world agriculture confronted with pollinator decline. Ecological Economics, 68(3), 810–821. http://doi.org/10.1016/j.ecolecon.2008.06.014 Garratt, M. P. D., Breeze, T. D., Jenner, N., Polce, C., Biesmeijer, J. C., & Potts, S. G. (2014). Avoiding a bad apple: Insect pollination enhances fruit quality and economic value. Agriculture, Ecosystems & Environment, 184, 34–40. http://doi.org/10.1016/j.agee.2013.10.032 Hanley, N., Breeze, T. D., Ellis, C., & Goulson, D. (2015). Measuring the economic value of pollination services: Principles, evidence and knowledge gaps. Ecosystem Services, 14, 124– 132. http://doi.org/10.1016/j.ecoser.2014.09.013 Hein, L., Bagstad, K., Edens, B., Obst, C., de Jong, R., & Lesschen, J. P. (2016) Defining Ecosystem Assets for Natural Capital Accounting. PLOS ONE, 11(11), e0164460. http://doi.org/10.1371/journal.pone.0164460 IPBES (2016). The assessment report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services on pollinators, pollination and food production. S.G. Potts, V. L. Imperatriz-Fonseca, and H. T. Ngo, (eds). Secretariat of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, Bonn, Germany. 552 pages. Klatt, B. K., Holzschuh, A., Westphal, C., Clough, Y., Smit, I., Pawelzik, E., & Tscharntke, T. (2014). Bee pollination improves crop quality, shelf life and commercial value. Proceedings. Biological Sciences, 281(1775), 20132440. http://doi.org/10.1098/rspb.2013.2440 Klein, A.-M., Vaissière, B. E., Cane, J. H., Steffan-Dewenter, I., Cunningham, S. A., Kremen, C., & Tscharntke, T. (2007). Importance of pollinators in changing landscapes for world crops. Proceedings of the Royal Society of London B: Biological Sciences, 274(1608). Retrieved from http://rspb.royalsocietypublishing.org/content/274/1608/303
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Landefeld, J. S., & McCulla, S. H. (2000) Accounting For Nonmarket Household Production Within A National Accounts Framework. Review of Income and Wealth, 46(3), 289–307. http://doi.org/10.1111/j.1475-4991.2000.tb00844.x Melathopoulos, A. P., Cutler, G. C., & Tyedmers, P. (2015). Where is the value in valuing pollination ecosystem services to agriculture? Ecological Economics, 109, 59–70. http://doi.org/10.1016/j.ecolecon.2014.11.007 Millennium Ecosystem Assessment. (2005) Ecosystems and Human Well-Being: Synthesis. Island Press, Washington, DC. Obst, C., Hein, L., & Edens, B. (2015) National Accounting and the Valuation of Ecosystem Assets and Their Services. Environmental and Resource Economics. http://doi.org/10.1007/s10640- 015-9921-1 ONS. (2017) Principles of Natural Capital Accounting. Ricketts, T. H., Daily, G. C., Ehrlich, P. R., & Michener, C. D. (2004). Economic value of tropical forest to coffee production. Proceedings of the National Academy of Sciences of the United States of America, 101(34), 12579–82. http://doi.org/10.1073/pnas.0405147101 Roman P and Thiry G (2016) The inclusive wealth index. A critical approach, Ecological Economics, 126:185-192 Rucker, R. R., Thurman, W. N., & Burgett, M. (2012). Honey Bee Pollination Markets and the Internalization of Reciprocal Benefits. American Journal of Agricultural Economics, 94(4), 956– 977. http://doi.org/10.1093/ajae/aas031 Sartori Catalano, G., Genco, M., Pancotti, C., Sirtori, E., Vignetti, S., & Del Bo C., (2014) Guide to Cost-Benefit Analysis of Investment Projects. Economic appraisal tool for Cohesion Policy 2014-2020”. European Commission, Directorate-General for Regional and Urban policy REGIO DG 02 – Communication Turner R.K. (2016) Economics and ecosystem services: a positive contribution to environmental management. In Potschin et al (2016) Eds. Routledge Handbook of Ecosystem Services. Routledge, London Turner R.K. (2016) The Balance Sheet approach. In Potschin et al (2016) Eds Routledge Handbook of Ecosystem Services, Routledge, London. UK National Ecosystem Assessment (2014) The UK National Ecosystem Assessment: Follow-on. UNEP-WCMC, LWEC, UK. United Nations, European Commission, Food and Agricultural Organization of the United Nations, International Monetary Fund, Organisation for Economic Co-operation and Development, The World Bank (2014a) System of Environmental-Economic Accounting 2012 – Central Framework. United Nations, New York United Nations, European Commission, Food and Agricultural Organization of the United Nations, Organisation for Economic Co-operation and Development, The World Bank (2014b) System of Environmental-Economic Accounting 2012 – Experimental Ecosystem Accounting. United Nations, New York UNU-IHDP and UNEP (2014) Inclusive Wealth Report 2014. Measuring progress toward sustainability. Cambridge: Cambridge University Press.
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Vincent J. R. (2015) valuing Environmental Services in the SNA. Report prepared for the Policy and Technical Experts Committee (PTEC) of the World Bank’s Wealth Accounting and Valuation of Ecosystem Services (WAVES) programme. Whiteley G., Shabb K., Korkeala O., Mccullough A., Smithers R. (2016) Reviewing cultural services valuation methodology for inclusion in aggregate UK natural capital estimates. Report for Office National Statistics. Ricardo Energy & Environment. World Bank (2006) ‘Where is the Wealth of Nations?’ Washington, DC: World Bank World Bank (2011) ‘The Changing Wealth of Nations’, Washington, DC: World Bank
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6 Annex
FULL TABLE of VALUATION METHODS FOR ESs as PROVIDED TO JRC
JRC-ESs Notes ES References for valuation (classification) approaches based on exchange prices
Terrestrial
Arable cropping Managed arable crops Fezzi, C, & Bateman, I. J. (2011). Structural require intense agricultural land use modeling for spatial (Intermediate) modification and human agro-15 environmental policy analysis. activities to realize American Journal of Agricultural Economics, 93, famers’ economic gain 1168-1188 that cannot be defined as true ESs (we UK-NEA (2011), UK-NEAFO (2014). acknowledge that ESs These works employed a spatially explicit provide free (input production function approach (consists of factor) gain to farmers). tracing, through chains of causality, the It sis essential that main impact of changes in final crops production arable crops will be due to the services of agricultural land) consider for this ES (e.g. which disentangles the effects of cereals, energy crops, agricultural land for crops profits. sugar beets, vegetables,
fruits…) Remme et al (2015). Monetary accounting of ecosystem services: A test case for Unmanaged arable crops Limburg province, the Netherlands. are more natural but Ecological Economics 112 (2015) 116–128. harvesting is still needed This work values with resource rent the to produce benefits, this arable crops. From the total revenue of the ESs are ignored in this crops intermediate labour and fixed costs report. are deducted to derive ESs price. Sandhu et al 2013. Experimental Assessment of Ecosystem Services in Agriculture. In Ecosystem Services in Agricultural and Urban Landscapes. Wiley and Sons. This paper suggests combining field experiment and avoided costs approach to assess arable crops ESs. Two case studies (Denmark-Porter 2009 and New Zealand-
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Sandhu 2008 and 2010) present the key components of methods but ESs estimates do not disentangle for individual farmland ESs.
FAO 2015, Natural Capital Impacts in Agriculture. Supporting better business decision making. This report applies benefit transfer of avoided costs estimates to assess the benefits of sustainable farming practices. Individual valuation of arable cropping is not available.
Nahuelhuel et al 2007. Valuing Ecosystem Services Of Chilean Temperate Rainforests. Environment, Development and Sustainability (2007) 9:481–499. The authors apply the Replacement costs to assess the natural soil fertility produced by tree assessing the market costs of fertilizer able to produce an equivalent soil production.
Outdoor animal The ecological Stevenson (2011). REVIEWING THE husbandry contribution to the COSTS: The economics of moving to higher welfare husbandry systems (free- farming. Compassion farming. the production (Intermediate) range, organic or outdoor costs of indoor and outdoor rearing are reared) of domesticated compared for different European case animals that can be used studies. for the production of food. The outdoor rearing of animal
provides higher organoleptic properties of food and better quality of life to animals.
Timber The ecological Nahuelhuel et al 2007. Valuing Ecosystem contribution to the Services of Chilean Temperate Rainforests. (Final) growth of tree for timber Environment, Development and Sustainability production. (2007) 9:481–499 suggest Adjusted Market price (average exchange rate for standing timber for different uses) for valuing timber production.
UK ONS (2017) “Principles of Natural Capital
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Accounting” The stumpages price is considered as good value of the unit resource rent.
Crop pollination Movement of floral Winfree, et al. 2011. Valuing pollination gametes for reproduction services to agriculture. Ecological Economics, (Intermediate) of plants thanks to wild 71: 80–88 suggest using replacement bees and pollinators. costs.
Ricketts and Lonsdorf (2013) Landscape effects on crop pollination services: Are there general patterns? Ecol. Lett. 11, 499– 515 and Jonsson et al. (2014) Ecological production functions for biological control services in agricultural landscapes; Methods in Ecology and Evolution 5, 243-252. Both authors suggest production function approaches.
Garrad et al 2014. Avoiding a bad apple: Insect pollination enhances fruit quality and economic value Agriculture, Ecosystems and Environment 184 (2014) 34–40 report an example of Adjusted Market price to assess pollinator services.
Erosion control Retention of soil within Yoshida (2014). The economic value of an ecosystem ecosystem services from agricultural and (Final) rural landscapes in Japan. In Ninan, “valuing ecosystem services”. The author reports details of replacement costs sustained to protect land from soil erosion.
Telles et al (2013) Valuation and assessment of soil erosion costs. Sci. Agric. v.70, n.3, p.209-216. Suggests a set of methods to assess soil erosion such as production function, replacement costs and avoided costs.
Barry et al (2011) Valuing Avoided Soil Erosion by Considering Private and Public Net Benefits, Presented Tahuna Conference Centre – Nelson, New Zealand. August 25-26, 2011 focus on private and public avoided
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costs by soil erosion.
Outdoor recreation The natural amenities Remme et al (2015). Monetary accounting which provide recreation of ecosystem services: A test case for (Final) opportunities for human Limburg province, the Netherlands. beings. Ecological Economics 112 (2015) 116–128. This work values with resource rent the values of nature-based tourism. From the total revenue of the tourism in different area of the province intermediate labour and fixed costs are deducted to derive ESs price.
Nahuelhuel et al 2007. Valuing Ecosystem Services Of Chilean Temperate Rainforests. Environment, Development and Sustainability (2007) 9:481–499 suggest the travel cost method to assess the value of Chilean natural forests which include waterfalls, scenery, wildlife etc.
Marine
Marine fish Wild fish species that can Anna (2017). Indonesian shrimp resource be harvested and used as accounting for sustainable stock (Final) food. Harvesting is still Management, Biodiversitas 18 (1): 248-256. needed to produce The author applies resource rent to assess benefits out of this ESs. the monetary value of fish stock.
Similarly, Obst, 2010. Issue #12: Valuation of Assets: A case study on the valuation of fish stocks, Prepared for the London Group of Experts on Environmental Accounting proposes and describes in details how to apply resource rent for fish stock assessment.
Freshwater
Water purification Removal or breakdown Mueller et al. 2016. Evaluating services and of excess nutrients of damage costs of degradation of a major lake (Final/Intermediate) compounds in water ecosystem, Ecosystem Services 22: 370–380. Authors describe how avoided costs methodology can be employed to assess
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lake water purification.
Goldman-Benner et al. (2012). Water funds and payments for ecosystem services: practice learns from theory and theory can learn from practice Fauna & Flora International, Oryx, 46(1), 55–63. The authors review the PES for different water services.
Water provisioning The provision of water Kumar 2005, Market for Ecosystem flow for human uses can Services, International Institute for Sustainable (Intermediate) produce several benefits Development (IISD). In this work a revision (e.g. bottle water) of payment for ecosystem services and fiscal instruments (subsides or marketable permits) used for valuing water provisioning services across the globe.
Remme et al (2015). Monetary accounting of ecosystem services: A test case for Limburg province, the Netherlands. Ecological Economics 112 (2015) 116–128. This work values with replacement cost the groundwater provision. The least-cost substitute that can reasonably be expected to replace groundwater is surface water and the difference average production costs is used as ES value.
Flood control The natural control of Ricardo Energy & Environment (2016) water flow in rainy Valuing flood-regulation services for
(Intermediate) season. inclusion in the UK ecosystem accounts. The study employs replacement costs to assess the natural flood retention.
Brookhuis &. Hein (2016) The value of the flood control service of tropical forests: A case study for Trinidad. Forest Policy and Economics 62:118–124. The avoided costs approached is described in this article.
Others
Air purification Removal or breakdown Remme et al (2015). Monetary accounting of excess nutrients of of ecosystem services: A test case for (Intermediate) compounds in the air Limburg province, the Netherlands.
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Ecological Economics 112 (2015) 116–128. This work values with avoided health cost the air regulation service.
Baro et al. 2014. Contributing of Ecosystem Services to Air quality and Climate change mitigation policies: the case of urban forests in Barcelona, Spain. AMBIO 2014, 43: 466- 479. A benefit transfer approach is applied to value air purification services.
Yoshida (2014) The economic value of ecosystem services from agricultural and rural landscapes in Japan. In Ninan, “valuing ecosystem services”. The author suggests replacement costs to assess natural air purification services.
Global climate Maintenance of stable Yoshida (2014) The economic value of regulation and sustainable air gases ecosystem services from agricultural and combination rural landscapes in Japan. In Ninan, “valuing (Final) ecosystem services”. The author suggests replacement costs to assess natural climate mitigation strategies.
Li et al. 2014 Prioritizing protection measures through ecosystem services valuation for the Napahai Wetland, Shangri- La County, Yunnan Province, China. International Journal of Sustainable Development & World Ecology 22:2, 142-150. The authors suggest adjusted market price and replacement costs to value climate regulating services.
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