Federal Statistical Office Germany
Environmental-Economic Accounting (EEA)
Environmental Degradation in the new SEEA
Proposals for a systematic presentation of environmental
degradation in the framework of EEA
November 2009
Martin O'Connor and Karl Schoer
© Statistisches Bundesamt, Wiesbaden 2009
Reproduction and distribution, also of parts, are permitted provided source is mentioned.
Contents
Introduction ....................................................................................................... 3
1. The General Schema and the Challenges for Valuation and Accounting ............... 6
2. The Main Classes of Environmental Assets.......................................................... 10
3. Economy-Environment Flows .............................................................................. 12
4. Prospects and Limits for Measurement and Monetary Valuation.......................... 18
5. Linking Stocks and Flows for macroeconomic performance assessment .............. 22
6. "Adjusted" Macroeconomic Performance Indicators ............................................ 27
7. Summing Up....................................................................................................... 32
References ......................................................................................................... 34
List of Figures
Figure 1
Quality Considerations for National Sustainability Indicators............... 5
Figure 2
Extracts from the SEEA 2003 Glossary ................................................. 6
Figure 3
Steps for Integrative Environmental Stock-Flow Accounting ................. 9
Figure 4
First-level framework for classifying information on economyenvironment flows............................................................................... 10
Figure 5
The four geo-spheres........................................................................... 10
Figure 6
Proposed Classes of Environmental Assets for the new SEEA ............... 11
Figure 7
Classification of Environmental Services/Functions ............................. 13
Figure 8
Environmental Asset Classes and associated Types of Services ........... 16
Figure 9
Inventory and Aggregation Steps for Integrative EconomyEnvironment-Flow Accounts................................................................. 17
Figure 10
Localisation of the Monetisation Frontier for Environmental Services ... 20
Figure 11
Valuation Issues for Air Pollution and Health Damage.......................... 26
Figure 12
Environmental Assets and Multiple Bottom Lines ................................ 27
Figure 13
Adjusted Aggregates in the SEEA ......................................................... 28
Figure 14
Steps from Hybrid Indicators to Monetary macroeconomic
adjusted aggregates............................................................................ 33
2
Environmental Degradation in the new SEEA 1
Proposals for a systematic presentation of environmental degradation in the
framework of Environmental-Economic Accounting
By Martin O’Connor and Karl Schoer 2
Preface
Currently the International Handbook on Environment-Economic Accounting (SEEA
2003) is being revised under the auspices of the UN. In this context, it is also intended
to redraft the current chapters 9 and 10 on “monetary valuation of environmental
degradation” and on “calculation of adjusted macro-economic aggregates” by
considering depletion and degradation of environmental assets by economic activities
(e.g. eco-domestic product). This article presents some important proposals to that
discussion made by the Federal Statistical Office Germany, which were developed
together with Martin O’Connor (UVSQ) as a consultant.
Introduction
This paper addresses fundamental questions of data organisation and data quality for
the accounting of environmental degradation — and of environmental improvements —
in the periodic accounting context of the new SEEA. 3 We present suggestions for a
systematic comprehensive framework for addressing degradation of environmental
assets as an enlargement of the SNA framework of assets/flows.
The SEEA extends the asset concept of the SNA by the inclusion of so-called nonproduced environmental assets. That is, the environment is included – in extension
and analogy to the SNA – as an additional type of asset. Changes in the state of the
environment are considered as qualitative (degradation or improvement) or
quantitative (depletion of resources) change of the environmental assets. The changes
of the environmental assets by economic activities are caused by environmental
pressures or environmental expenditures. These factors are presented in the
accounting system as flows (analogous to depreciation and investment). The flows of
services .which are furnished by the environment (that is, from environmental assets)
are viewed – in analogy to the SNA – as primary inputs (production factors) into
production and consumption processes (in a comprehensive sense). 4
In order to provide a framework for these extended accounting tasks, two key elements
have to be developed: (1) extended stock accounts by classes of environmental assets
as well as (2) extended flow accounts for the interaction between economic activities
and environmental assets.
1 SEEA – System of Integrated Environmental Economic Accounting.
2 Martin O’Connor is Professor of Economics at the Université de Versailles St-Quentin-en-Yvelines (UVSQ,
France) and Scientific director of the Equipe IACA du C3ED (Centre d’Economie et d’Ethique pour
l’Environnement et le Developpement) responsible for research in ecological economics, eco-innovation
and action research methods for sustainable development. Until 2007, Karl Schoer was in charge of the
Federal Statistical Office’s division of Environmental-Economic Accounting.
3 The reference document for the SEEA revision process is: United Nations (2003), Handbook of National
Accounting: Integrated Environmental and Economic Accounting 2003, Studies in Methods, Series F,
No.61, Rev.1 (ST/ESA/STAT/SER.F/Rev.1), Statistics Commission of the United Nations, New York, 572pp.
We refer henceforth to SEEA (2003), and give citations by chapter and numbered paragraph.
4 By environmental services/functions [and dysfunctions] we refer to the spectrum of different classes of
benefits e.g. economic productivity, human health or comfort, amenities, that are available spontaneously
or that are ‘extracted’ from the biophysical environment. There is a very wide (and varied) literature that we
do not seek to review; for entry points see: Daily (ed., 1997); De Groot (1992); De Haan (2004); Maxim,
Spangenberg and O’Connor (2009).
3
The environmental asset are “non-produced” by definition. In addition, the interaction
between the economy and the environment is very complex, with only some aspects
being under direct human control and even less being the object of monetary
transactions. Therefore the primary data for the compilation of this category of
extended accounts are, as a rule, available only in physical terms and, moreover, only
to an incomplete or approximate extent. The conversion of this physical information
into monetary terms, as the logic of the SNA accounting conventions might suggest, is
a further — and as will discussed in this paper — difficult step in accounts production.
In sum, integrated accounting of environmental degradation means linking changes in
environmental asset quality to the spectrum of economy-environment flows which,
conventionally, are described as pressures, services or expenditures. In the
contemporary policy context of environmental quality, protection and sustainability
goals, these accounting features must be supplemented by reference norms that
establish the conceptual links between period-by-period accounts for environmental
assets (and their changes) and for “flows (pressures, services and expenditures), and
the policy domains of development, environment and sustainability.
The central question here is, what mix of monetary and non monetary information) for
describing changes in environmental assets and for the flows of environmental
pressures, expenditures and services/functions from period to period. Good quality
figures for monetary values can often be obtained for individual items in the economyenvironment flow accounts. 5 But, the complexity of the cause-effect chains (through
space and time) means that estimations of a money value for overall environmental
asset changes — that necessarily depend on an array of modelling, imputation and
other operations that take us far beyond ‘accounting’ as such — are highly speculative,
often varying by orders of magnitude depending on the methods and hypotheses
adopted. 6
Thus, although physical and monetary data on environmental asset changes (and on
the related expenditures, pressures and services, or loss of services, etc.) are
important from a policy perspective, the quality of such data (notably concerning
uncertainties of attribution, measurement and method-dependent estimations) means
that aggregate figures for most classes of environmental asset change are likely to be
controversial and, in any case, not of a statistical quality comparable with other
economic aggregate indicators.
The text-box (figure 1) below frames four quality considerations, initially formulated
with specific reference to adjusted aggregate indicators, that are applicable to all
aspects of SEEA environmental degradation accounting.
Statistics quality has to be assessed as a matter of fitness for purpose. Some
individual components of environmental asset and flow accounts are of high quality;
but this does not mean that monetary valuations for an asset class as a whole, or for a
corresponding “degradation adjusted income”, can be obtained with the same quality
standards. In the SEEA context, accounting — whether by monetary valuation or by use
of other metrics — is a means to an end:
5 Examples of individual items where high quality monetary figures may sometimes be available, without
asset change being quantifiable, include: (1) money payments for ‘rights’ or ‘permits’ to emit pollutants or
to extract biological resources, where the emission/harvesting activity is known to provoke damaging
environmental changes but where the future significance of these changes is difficult to quantify; (2) soil
productivity losses due to specific pressures such as chemical contamination; (3) societal welfare losses
due to specific service losses (e.g., health care costs or losses of working days due to effects of air
pollution).
6 We will return several times to these fundamental identification and measurement questions. It is to be
emphasised that the difficulties are not only about empirical estimation but also about conceptual
framing. For some introductions to this very fundamental challenge in environmental science and
accounting, see: Douguet, O’Connor and van der Sluijs (2009); Edmonds and Reilly (1985); England
(2006); Funtowicz and Ravetz (1994); Thompson and Warburton (1985); Victor, Hanna and Kubursi
(1998).
4
•
If the purpose is to provide inputs to a specific project or policy assessment using
cost-benefit or multi-criteria methods, then monetary estimates for benefits and
damages associated with environmental change can often have high relevance —
even when there are divergences of opinion about methods and there are
significant uncertainties;
•
If the purpose is to provide high-level or “headline” indicators of environmental
performance at a macro-economic scale as guidance to policymakers, then it can
be misleading to propose indicators that either are characterized by very high
estimation uncertainties and/or are based on very incomplete coverage of the
environmental asset changes.
Figure 1: Quality Considerations for National Sustainability Indicators
SCIENTIFIC ADEQUACY: do the description and evaluation methods deal well
(coherently, incisively) with the important features of the natural world and of the
ecological, technological and social change processes in question?
SOCIAL ADEQUACY (RELEVANCE OR PERTINENCE): do the methods furnish
information in ways that respond to stake-holders’ needs and the support social
processes of decision making?
ECONOMIC RATIONALITY: do the suggested choices or courses of action that
emerge from the valuation, statistical analysis, in the sense of appearing to be
reasonably cost-effective ways for moving in the desired directions or for arriving
at the envisaged outcomes?
STATISTICAL QUALITY: can the methods and measurements proposed be
implemented in conformity with established quality standards in statistical work,
within the budgets available for this work?
Knowledge Quality — Fitness for Purpose
The
EC-funded
GREENSTAMP
project
(1995-1997),
presenting
recommendations about appropriate methods for calculation of
environmentally adjusted national income figures, set out four broad sets of
quality considerations that are necessary for useful indicators (see inset
box). No one of these four criteria on its own is enough to justify or to judge
the adequacy of an approach to development of macro-economic indicators
for sustainability:
“Our work has consisted of a process of ‘tuning’ theory, statistical concepts,
actual measurement and the corresponding interpretation and use of
results. When it has turned out that a theoretical concept is not applicable to
the situation being analysed, or that it cannot be measured in a reliable way,
then we have abandoned it as inadequate for offering policy guidelines.” 7
Overall, in this paper we try to make suggestions for a framework that can really be
applied by practitioners with meaningful and intelligible results, e.g., to build a country
profile in this way within a period of 12 months, for one or several classes of
environmental assets.
7 Source: Brouwer and O’Connor (1997), Methodological Problems in the Calculation of Environmentally
Adjusted National Income Figures, Final Reports of the GREENSTAMP Project (C3ED, Guyancourt, 1997).
5
1.
The General Schema and the Challenges for
Valuation and Accounting
1.1 As stated in SEEA 2003 [10.23], “The heart of the discussion about integrating
environmental issues within standard accounting is about incorporating additions to
and deductions from the stock of natural resources within the flow accounts. The
rationale for this is a change in the primary focus of the economic accounts from a
concentration on production itself to see how economic production affects measures
of wealth which include environmental assets and measures of income which are
concerned about maintaining the levels of these assets as well as produced assets.”
The corresponding treatment of environmental degradation must be reconciled with
the overall stocks/flows framework of national periodic accounting that underpins the
SEEA: 8
Figure 2: Extracts from the SEEA 2003 Glossary
Assets (SNA 10.2 and 13.12): Assets are entities functioning as stores of value and
over which ownership rights are enforced by institutional units, individually or
collectively, and from which economic benefits may be derived by their owners by
holding them, or using them, over a period of time (the economic benefits consist
of primary incomes derived from the use of the asset and the value, including
possible holding gains/losses, that could be realised by disposing of the asset or
terminating it).
Environmental assets (SEEA) (SEEA 7.92): Naturally occurring entities that provide
environmental “functions” or services. Environmental assets in the SEEA are
broader than environmental assets in the SNA: they cover all assets including those
which have no economic values, but bring indirect uses benefits, options and
bequest benefits or simply existence benefits which cannot be translated into a
present day monetary value.
Environmental assets (SNA) (SNA 13.53): Environmental assets correspond to
tangible non-produced assets. They are assets that occur in nature and over which
ownership rights have been established and which provide economic benefits to
their owner. Environmental assets over which ownership rights have not, or cannot,
be established, such as the high seas or air, are excluded because they do not
qualify as economic assets.
Source: http://unstats.un.org/unsd/envaccounting/Glossary_draft.pdf
Stocks: The SEEA 2003 (Section 7.91) defines environmental assets
accounts as “accounts that describe in physical and/or monetary units the
stocks and changes in stocks of environmental assets”.
Service flows: Environmental services (SEEA 1.1; see also SEEA 7.31 and
7.35) “…include the provision of raw materials and energy used to produce
goods and services (‘resource functions’), the absorption of waste from
human activities (‘sink functions’), and the basic roles in life support and the
provision of other amenities such as landscape (other ‘services functions’)”.
8 In this paper, we discuss mainly structure concepts for a single nation’s accounts, leaving detailed
considerations of cross-boundary accounting of environmental degradation for another time. On this latter
aspect, which constitutes a further specific dimension for the ‘adjustment’ of national accounts, see
Muradian and O’Connor (2001), Muradian, O’Connor and Martinez-Alier (2002), and further references
there.
6
1.2 The SEEA 2003 considers the “environmental sphere” as a conglomerate of several
different classes of ‘assets’. In some cases, these assets are quantified explicitly, e.g.,
certain types of Subsoil assets, Energy resources. In other cases, such as water
resources, the atmosphere and biodiversity, the basis for quantification is less clearly
established and the relative emphasis is on the qualitative benefits, services or
functions for human societies. Whereas the SNA 1993 limits the use of the term
‘assets’ to cover only components of nature for which a clear ‘ownership’ is
established, the SEEA adopts a wider perimeter.
In effect, the SEEA must explicitly consider as ‘assets’ all facets or ‘sectors’ of the
environment that (1) contribute to well-being and economic productivity in particular
and (2) whose roles for human economy and well-being can be significantly modified
by human actions (see Figure 2).
1.3 Environmental assets provide benefits to human society, differently distributed
across space and time. But these benefits (or absence of nuisance) cannot be taken
for granted. Not only is Nature’s providence limited (and sometimes fluctuating or
ephemeral), but also human activities can have significant impacts on assets and, by
consequence, on the ability of these assets to continue to provide the services and
benefits previously enjoyed.
The SEEA is interested therefore in both (1) the contributions of environmental assets
via services to economic production and consumption processes, and (2) the
environmental effects of « economic activities ». For SEEA purposes, these economyenvironment interactions are to be accounted in ‘flow’ accounts. These contributions
and effects can, in principle, be either positive or negative. So, in each direction of
“flows”, a distinction can be made between “beneficial” and “nuisance” flows. Using
conventional language, we speak of:
•
(A1) the “services” received from the environment to economic sectors, and, by
corollary (A2) the disruptions [or dis-services] to economic activity provoked by the
environment.
•
(B1) the detrimental effects (which may be intentional or unintentional) of
economic activities on the environment, often termed the pressures that human
societies exercise on the environment through extraction of resources, occupation
of space, disposal of wastes, etc., and, correspondingly, (B2) the beneficial effects
that, by intent or by luck, can improve (relative to some reference point) the
environment’s present and future capacity to provide benefits, services and
functions and that, to the extent that they engage scarce economic resources, are
expenditures that constitute investments in the environment that may mitigate or
even ‘restore’ the quality/quantity of environmental assets.
All of these four terms — services, disruptions, pressures and expenditures — refer
thus to a common preoccupation: to describe the roles that the environment has
relative to economic activity and well-being and, in particular, the ways that economic
activity may modify this contribution, or capacity for future contribution, of the
environment. Thus, for example, description of a flow as a pressure leads usually to
the identification of one or more services whose present or future quality is put in
danger by the pressure. The activities of resource extraction, surface occupation,
pollutant emission (etc.) are from one point of view ‘pressures on the environment’,
and from another point of view ‘functions’ or ‘services’ provided by the environment.
However, the link between a quantified pressure in a given accounting period, and the
effects of this pressure on the provision of the ‘functions’ or ‘services’ in the same
period or future periods, will often be imprecise (e.g., subject to scientific uncertainty).
1.4 For the SEEA 2003, carrying on from the earlier SNA conventions, it is asserted as
fundamental [Chapter 7, Section 7.22] that “…there is a direct link between the entries
in the asset account, including the question of ownership, and the entries [that]
appear in the flow accounts”. However, it is also immediately stated that “this is an
area where quite different views are held about whether and how the flow accounts
7
should be brought into strict conformity with the asset accounts”. The reasons for the
dissension are multiple, and for our purposes can be summed up as follows:
•
difficulties with quantitative inventory, whether in physical or monetary terms, of
most classes of environmental assets and of environmental asset changes due to
actions in a given accounting period;
•
difficulties with measurement of the ‘flows’ from or towards the environment
and/or with measurement or estimation of changes in these flows; and
•
difficulties with establishing/quantifying the link between ‘flows’ from or towards
the environment in a given accounting period, and the changes in environmental
asset quality/quantity (and, hence, in the capacity of these assets to provide
benefits, services and functions in future periods).
1.5 There are far-reaching consequences of these classification and measurement
difficulties concerning the prospects for monetary valuations that would permit
integrated stock/flow accounting following the SNA 1993 conventions. In effect,
meaningful monetary valuations of environmental assets and improvements/damages
and of the associated economy-environment flows may sometimes be impossible.
Even when meaningful monetary valuations can be provided, very often these will be
associated with very wide estimation uncertainties meaning that aggregation with
other economic accounts data becomes problematical. We will return to this point on
an asset-by-asset basis in Section 5 below.
1.6 These deep challenges to money valuation of environmental assets, of economyenvironment flows and of the links between these flows and changes in environmental
‘stocks’ (assets), are intrinsically related to the complex and ‘non-produced’ character
of environmental assets. If it is accepted that the new generation of environmental
accounting must propose a framework for full coverage of all major classes of
environmental assets and asset change [the ‘stocks’] and of economy-environment
‘flows’, then it follows that the approach to environmental degradation in the new
SEEA must accept these distinctive features and the limitations for the scope and
ambition of monetary valuation and of aggregation that they imply, and development
conventions accordingly.
1.7 Procedures for systematic accounting of environmental degradation in the new
SEEA must, we propose, address five complementary tasks as summed up in a tabular
format in Figure 3 below.
1.8 The emphasis here is on building up the framework for a descriptive profile of
economy-environmental interactions and their significance for environmental asset
change, and vice versa.
These proposals for an extended accounting of environmental degradation (and
improvements) can be summarised in the format of a 3-D array (see schema in Figure
4). Within this schema, all “flows” — that is, pressures, expenditures and
benefits/services — are ‘located’ or classified in terms of the economic sector, the
environmental asset class, and the environmental service type.
In effect, we are proposing the explicit treatment of nature as a ‘sector’ — or, more
exactly, several sectors (see Section 2 below). 9 From a systems dynamics standpoint,
9 In the SEEA context this line of approach has previously been suggested by Vanoli (1995; see also SEEA
2003 paragraph 10.102). Suggestions in environmental economics for stock/flow accounting in terms of an
array of interdependent economic and environmental sectors date back several decades, at least as far as
Daly (1968), Isard (1968, 1972), Ayres and Kneese (1969) and Victor (1972). These authors were also highly
aware of the intrinsic uncertainties of description and modelling of integrated economy-environment
systems. A systematic fund-flow joint-production formulation based on mass and energy accounting, was
laid out in O’Connor (1993, 1994) who, like Victor (1972) before him, emphasised the distinction between
didactic clarity about structure of interdependencies and perspectives of quantification. There are obvious
links from these early ecological economics concepts, to the more recent efforts at operational MFA
(materials flow accounts) and integrated approaches to ecosystem services accounting.
8
when the environment is considered as a set of interdependent « sectors » it follows
that there will be interactions or ‘flows’ between these sectors. In the accounting
conventions proposed here, there is no attempt, at this stage, to provide for explicit
accounting of environment-environment flows. What is proposed is to attribute
“pressures” from an economic sector, to the environmental sector or sectors that are
being “impacted” (hence changed). 10
Figure 3: Steps for Integrative Environmental Stock-Flow Accounting
Step/Task
Suggested Framework Conventions for SEEA Environmental
Degradation
Environmental Asset
‘Stock inventories’
A systematic and pragmatic indicator-based approach to the
‘inventory’ of each major class of environmental asset, based on a
slightly revised asset classification (relative to SEEA 2003) and
based on physical data in a spatial reference frame.
Economy-environment
Flow accounts
A systematic framework of classifications should be agreed, notably
concerning environmental services/functions, so as to permit an
integrated view, for each ‘environmental sector’, of: (i) investments
in environmental protection or improvement and (ii) ‘pressures’
from the economy, relative to the distinct categories of
services/functions from the environment.
Articulation of ‘stock’
and ‘flow’ information
in hybrid accounts
Building directly on the above two steps, the links between ‘flows’
and ‘Stocks’ should be established in ‘hybrid’ terms, viz., by making
explicit, for each class of environmental asset, the links between
the ‘flows’ of expenditures and pressures (from economic sectors to
the environment) and of services (from the different asset ‘sectors’
of the environment) and environmental asset quality/quantity
change. (These linkages will, in many cases, be characterised by
uncertainties, but the framework is more important than perfect
measurement.)
Monetary valuation of
environmental stocks
and flows
It must be determined, for each class of environmental asset, for
what components of the asset, or asset change, or
function/services associated with the asset, there can be
meaningful and pertinent estimates of monetary values, and with
what sorts of frameworks for estimation (e. g., so-called ‘supply
side’ methods estimating costs of maintaining or respecting norms
for services, functions or asset quality; or so-called ‘demand side’
methods estimating flows of benefits or damages).
Defining and estimating
Adjusted Aggregates
Once a clear view has been established of the scope for meaningful
and pertinent estimates of monetary values, conventions must be
defined for which of these components of environmental assets
and/or asset changes and/or benefit/damage flows shall be made
the basis for so-called ‘environmentally adjusted’ monetary
aggregate indicators of wealth (stocks) and income (flows). There
are several different types of adjusted aggregates, all of which can
have policy relevance.
1.9 Given the complexity of environmental processes and the multiple timed frames
(etc.), such causal links will, in many cases, be identifiable only in a qualitative and
tentative way. This is why, methodological priority is accorded to compiling ‘hybrid’
accounts in this disaggregated way with multiple metrics, before any attempt is made
at monetisation and aggregation.
10 If it were desired to signal the environmental dynamics, this could in principle be done through influence
diagrams which allow the pathways of pressure impacts to be declared (e.g., effects of climate system
change due to GHG concentrations, on ocean acidity due to CO2 absorption, and on marine biodiversity
such as corals…). However, in view of the system complexities, this sort of attribution of influences will
necessarily remain qualitative and, moreover, this would constitute modelling and not accounting. Given
that our objective here is accounting and not analytical modelling, for the SEEA reform purposes we
propose not to pretend to ‘unpack’ the environmental “black box”.
9
Figure 4: First-level framework for classifying information on economy-environment
flows
Z-axis — Categories of
ENVIRONMENTAL
FUNCTIONS/SERVICES
Y-axis —Sectors of
ECONOMIC ACTIVITY
X-axis — Classes of
ENVIRONMENTAL ASSETS
2.
The Main Classes of Environmental Assets
2.1 In the SEEA 2003 [paragraph 3.80], a definition of the environmental sphere is
given as including “… all physical entities other than [economic] products and
corresponding flows. The environmental sphere provides resources to, and receives
residuals from, one or more national economies…”.
Figure 5: The four geo-spheres
Biosphere, Lithosphere, Hydrosphere, Atmosphere
The lithosphere is the solid, rocky crust covering entire planet. This crust is
inorganic and is composed of minerals. It covers the entire surface of the earth
from the top of Mount Everest to the bottom of the Mariana Trench.
The hydrosphere is composed of all of the water on or near the earth. This
includes the oceans, rivers, lakes, and even the moisture in the air. Ninety-seven
percent of the earth’s water is in the oceans. The remaining three percent is fresh
water; three-quarters of the fresh water is solid and exists in ice sheets.
The biosphere is composed of all living organisms. Plants, animals, and onecelled organisms are all part of the biosphere. Most of the planet’s life is found
from three meters below the ground to thirty meters above it and in the top 200
meters of the oceans and seas.
The atmosphere is the body of air which surrounds our planet. Most of our
atmosphere is located close to the earth’s surface where is most dense. The air of
our planet is 79 % nitrogen and just under 21 % oxygen; the small amount
remaining is composed of carbon dioxide and other gases.
Source: http:// geography.about.com/od/physicalgeography/a/fourspheres.htm
10
2.2 For accounting purposes, several distinct facets of this environmental sphere must
be distinguished. In the natural sciences literature, the area near the surface of the
earth is conventionally divided up into four inter-connected “geo-spheres” — the
biosphere, lithosphere, hydrosphere, and atmosphere. Scientists classify life and
material on or near the surface of the earth to be in any of these four spheres (see
Figure 5).
2.3 These “four geo-spheres” inter-penetrate and, in this sense, all four spheres can
be and often are present in a single location. For example, a piece of soil will have
mineral material from the lithosphere and additionally, there will be elements of the
hydrosphere present as moisture within the soil, the biosphere as insects and plants,
and the atmosphere as pockets of air between soil pieces.
2.4 It is useful to adopt this framework of the “four geo-spheres” as a backdrop for
classification of environmental assets in the new SEEA. Taking account of the existing
classifications (SNA 1993 and SEEA 2003) and also major environmental degradation
challenges recognised in contemporary sustainability debates, the following pragmatic
classification is suggested (right hand column of the table in Figure 6 below):
Relative to the SEEA 2003 asset classification (see Chapter 7 of the SEEA 2003 and,
notably the Table 7.2 on page 252), the following relatively minor changes are implied:
(1) separate Climate system from Air quality, in view of their different scales and
mechanisms; (2) include Marine water (Oceans) as an asset in view of the growing
significance of ocean water quality, and of possible sea level changes.
2.5 Given the inter-penetration of these 8 distinct components of the environment, it is
useful to think of them as environmental sectors that are interdependent with each
other in a dynamic way. For accounting purposes, it is also useful to consider the 8
environmental assets as ‘bands’ of attributes of a territory in an integrated spatial
perspective [see the list, numbered from 0 to 7, in Figure 6]. For each ‘band’, a
description with multiple attributes can be proposed, that could become the basis for
the physical ‘inventory’ of a nation’s assets in each class. By using an explicit spatial
framework (e.g., aided by GIS techniques), it is easy to specify ways that the ‘bands’
overlap (e.g., soil and biodiversity as features of land cover) without double-counting
of assets. Also, the territorial environmental accounting can readily be overlain by
‘anthropo-sphere’ classifications of human uses, ownership, zoning (signalled as the
upper layers of the table in Figure 6).
Figure 6: Proposed Classes of Environmental Assets for the new SEEA
Antroposphere
Lithosphere
Biosphere
Hydrosphere
Atmosphere
Zoning – Governance / Institutional Classifications
Ownership, Occupation, Human uses
Land Surface (as an accounting basis for Land Cover inventories)
0
Sub-soil assets (including minerals, energy resources in stock forms,
etc.)
1
Soil Assets (Soil Types, Quality, etc.)
2
Terrestrial, Freshwater, Marine and Airborne biodiversity (with
appropriate sub-divisions for ‘cultivated’ biological resources and ‘noncultivated’ biodiversity)
3
Fresh water resources (including surface water and major ground-water
bodies)
4
Marine water resources (quantitatively inexhaustible but qualitatively
variable)
5
Climate system (perhaps including solar radiation as energy flow and lifesupport?)
6
Air quality (from the point of view of human health and wider life)
7
11
3.
Economy-Environment Flows
3.1 In order to prepare the ground for integrated environmental stock/flow accounts, a
systematic framework of classifications should be agreed that permits an integrated
view, for each ‘environmental sector’ (as defined in 1.2 above), of:
•
expenditure in environmental protection or improvement;
•
pressures from the economy; and
•
services/functions (and in a few cases, specific nuisances) from the environment.
In this paper we do not further discuss the first item (environmental expenditures),
other than noting the logical need to attribute such expenditures to the appropriate
environmental asset/sector (and, in this process, avoid double counting) in view of the
postulated significance for environmental services from that sector. However, the
questions arising about quantifying effects of such expenditures for future services
and (hence) for the ‘capitalised’ value of the asset, are broadly analogous to those
arising for pressures, to which we now turn.
We start with a recapitulation of key definitions in the SEEA context and, on this
foundation, propose a high level classification of environmental services as a key
dimension of the SEEA environmental degradation accounts framework. We then
outline how this framework provides, in a pragmatic way, a response to the crucial
statistics quality challenges of uncertainty and system complexity that are a dominant
feature in our efforts at integrated environmental asset/flow accounting.
3.2 The concept of environmental pressures is by now well established and, notably in
the context of NAMEA-type accounting systems, there are fairly well-tried classification
frameworks for grouping environmental pressures by types of impact. Thus, while the
SEEA 2003 Glossary does not define ‘pressures’ as such, it specifies [SEEA 4.94]
“Environmental theme” which is a “specific environmental phenomena or concern:
greenhouse effect, ozone layer depletion, acidification, eutrophication, etc.” For
aggregated description of environmental pressures, various residuals are converted
into “theme equivalents” using conversion factors. If, following the logic of PSI
[Pressure-State-Impact] or DPSIR [Driving Forces – P-S-I Response], each of the agreed
‘pressure’ themes can be attributed to specific environmental sectors (as defined in
1.2 above) that are sources of specific environmental services (as will be discussed
just below), then the conceptual basis exists for physical accounting of these flows
(pressures) provoking changes in environmental assets and subsequent service
provision capacity.
3.3 The concept of environmental pressure thus already acknowledges the
environment as a source of ‘services’ to the economy. The SEEA 2003 [1.1] defines
Environmental services to include “the provision of raw materials and energy used to
produce goods and services, the absorption of waste from human activities, and the
basic roles in life support and the provision of other amenities such as landscape”. 11
However, the SEEA 2003 does not develop systematically the classification of
environmental functions/services. For the new SEEA’s purposes of systematic
accounting of environmental degradation, there is in principle a need for an explicit
convention for inventory of key environmental services/functions (whose quality or
availability may be endangered by pressures).
Since the 1990s there has been much work in this field, and the experience gained
suggests that there can usefully be proposed some robust conventions for typology of
the environmental services-values-functions that could generically be applied for
11 Analogously it also defines Environmental functions [SEEA_2003 7.31 and 7.35] to be “the various uses
to which naturally functions are distinguished: resource functions, sink functions and service functions”
[sic].
12
‘flows’ relating to each environmental asset. The table in Figure 7 gives a presentation
of a typical ‘first level’ classification.
Figure 7: Classification of Environmental Services/Functions
SOURCE
Exploitable Natural Resources
Availability of stocks non-renewable natural resources;
Flows of renewable non-biological resources (solar radiation, terrestrial heat,
hydrological cycle, etc.);
Regeneration and Production of biological resources: production of biomass
providing raw materials and food, pollination and seed dispersal
SINC
Reception of Wastes, including Purification and Detoxification: filtration,
purification and detoxification of air, water and soils
SUPPORT
Life support (for human societies and other life)
Cycling Processes: nutrient cycling, nitrogen fixation, carbon sequestration,
soil formation;
Regulation and Stabilisation: pest and disease control, climate regulation,
mitigation of storms and floods, erosion control, regulation of rainfall and
water supply;
Life-support functions including Habitat Provision: refuge for animals and
plants, storehouse for genetic material
SCENE
The environment in situ as an object of cognition and appreciation – e.g.,
Information and Learning (including formal education and research), Lifefulfilling (aesthetic, recreational, cultural and spiritual roles).
SITE
Space (2-D surface or 3-D volume) as a Site of economic activities (including
buildings and infrastructures, stockage of durable wastes).
[Diverse Sources (cf. De Groot (1992); Daily (ed., 1997; Faucheux and O’Connor (eds., 1998); also
Millennium Assessment)]
3.4 The role of this typology of Environmental Services is to act as a structuring
element for the organisation of a system of integrated accounting of environmental
assets and their degradation (and improvement), in a way that takes systematically
into consideration the intrinsic difficulties with measurement and monetary valuation
imposed by system complexity and multi-period effects.
The central question that we are addressing is: in what sense and to what degree can
we describe and measure, and evaluate the significance for economic activity and
human well-being, the distinctive “stocks” (and stock changes) of each of the
environmental sectors distinguished in 1.2 above. Conceptually, we attack this
challenge through the task of making an inventory of the “flows” to and from the
economy (in aggregate or by sector) of benefits/services or pressures (etc.) associated
with each of these environmental assets (treated analogously as “sectors”). We seek
to describe the components in causal chains with the links as follows:
(1)
Economic activities (with standard SNA classification by sector of production
activity or final use) generating pressures on the environment;
(2)
Effect of these Pressures on the state of the different classes of environmental
assets;
(3)
The Impacts of these changes of the State of environmental assets (by
“sector”) on the provision of Environmental Services to the economy (by
sector).
(4)
Consequences of these service/nuisance flows for economic activity and
societal well-being.
13
3.5 In concept, the task of making an inventory of economy-environment flows is now
clear-cut. With the aid of the above proposals for Environmental Asset and Service
classification, the links between economy-environment ‘flows’ and environmental
assets (or ‘stocks’) can be established in ‘hybrid’ terms, by making explicit in a
crossed-matrix format, for each class of Environmental Asset, the links between the
three categories of ‘flows’ — investments, pressures and services — and the asset’s
quality/quantity change.
However, in this respect some innovations are required for the new SEEA relative to
established SNA practice.
First, consider the line of attack for integrated environmental asset/flow accounting in
line with SNA conventions. In effect, if an inventory could be made of all flows on the
Economy/Environment interfaces — that is, cell-by-cell in a 2-D array between an
Economic sector and an Environmental sector (with appropriate care to avoid double
counting, etc.), and if moreover one could present all entries in monetary units, the
accounts basis would be established for linking environmental asset changes to
economy-environment flows in a determinate and unambiguous way.
But, empirically this is not possible. In contrast with the case of SNA flow/asset
accounting within the economic system, there are deep and intrinsic data and
measurement difficulties associated with making the causal links in the sequence
P-S-I for the environmental assets and services (cf., Maxim, Spangenberg and
O’Connor, 2007). In the framework that we are proposing, these difficulties relate
formally to the attribution and quantification of flows. Notably:
•
The term ‘Pressures’ refers to exploitations of environmental sectors by the
Economy. Many of these pressures are initiated by economic actors (e.g.,
extraction of natural resources, rejection of wastes or pollutants, occupation of
space) and their origins are well-known. Such pressures therefore are associated
in the first instance with Economic Sectors. 12 The incidence of pressure flows must
be attributed across relevant Environmental Sectors, at which point difficulties can
arise….
•
Similar considerations apply for Environmental Expenditures whose intended
effects are, e.g., (1) reduction of pressures or (2) restoration of environmental
quality. These Expenditures are associated in the first instance with Economic
Sectors. 13 The incidence of expenditures must be attributed across relevant
Environmental Sectors, at which point difficulties can arise….
•
By comparison, the term Environmental Services refers, in the first instance, to the
Environmental “Sectors” (the Asset classes) as sources or origins of the ‘flows’
whose incidence must be attributed across relevant Economic Sectors, at which
point difficulties can arise.
For an accounting in terms of effects, causal links have to be proposed in two
directions: from economy to environment, and, from environment to economy. In both
directions there are attribution difficulties and, moreover, the two directions of
attribution overlap and interfere. What is a ‘service’ from one point of view, can be a
‘pressure’, or closely related to a pressure from the other point of view, e.g., emission
of toxic wastes into the environment (the ‘sink’ service) from the economy (waste
disposal as a pressure). However, while work on national accounts for major
12 For example, The Netherlands with the NAMEA system have developed accounts for several major
categories of environmental pressures (see, e.g., Keuning 2000; van Ierland, E., J. van der Straaten and
H. Vollebergh (eds.) 2002; De Haan 2004). The Federal Statistical Office Germany is now publishing
detailed data on pressure indicators by economic activities (production branches, and final uses) on an
annual basis. See the link:
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Navigation/Publications/Spe
cializedpublications/EnvironmentalEconomicAccounting,templateId=renderPrint.psml__nnn=true.
13 Again, see the regular publications of the Federal Statistical Office Germany at:
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Navigation/Publications/Spe
cializedpublications/EnvironmentalEconomicAccounting,templateId=renderPrint.psml__nnn=true.
14
categories of environmental pressures and expenditures has already developed a long
way, attempts at a systematic empirical recording of service flows — except of the
indirect reporting by related pressure flows (e.g. air emissions = absorption service) —
are still in their infancy.
3.6 Consider the special case of Sub-soil stock assets. The ‘pressure’ and ‘service’ are
identical (units of resource extracted), and there is a determinate causal link — a oneto-one correspondence — between the pressure (units extracted in a period) and the
state of the asset (stocks remaining) and the future services capacity (amount of
resource still available). But, by contrast with this special case, for most other
categories of pressures/assets/services, such a determinate quantitative sequence of
causal links cannot be given. There are various reasons for this, which are related to
the points made in the Introduction of this paper:
•
the interactions between the economy and the environment are very complex;
•
only some aspects of the service flows are under direct human control (even less
being the object of monetary transactions);
•
the primary data concerning services are, as a rule, available only in physical terms
and, moreover, only in an approximate way. 14
The result is that, for most types of economy-environment flows, and the associated
asset changes, the application of this accounting framework will be possible only as a
qualitative and imperfect exercise. The causal links that are affirmed by the attribution
will, in many cases, be the object of some scientific uncertainties as to their exact
mechanisms and effects. 15
3.7 It is suggested to attribute individual pressure and expenditure flows not only to a
specific Environmental Asset, but also to a specific category of Environmental Service
associated with this asset (cf., Figure 4 above). The reasoning underlying this
suggestion, is that this qualitative attribution procedure — although necessarily a
matter of judgement with associated uncertainties — makes visible in a systematic
way the causal sequences (and, hence, the feedback loops that may exist) linking
economic activities and environmental activities.
•
In the case of pressures, where the origin within one or more economic sector is
known with more or less precision, the first accounting task is to establish not a
quantitative but a qualitative assignment of pressures to the change(s) of one or
more specified Environmental assets, in the sense that the increase of a certain
pressure will have (or is likely to have) the effect of degrading the respective
asset(s).
14 The underlying consideration here can be summed up in the question: who or what controls the flows of
environmental services? In this regard we can distinguish, at one extreme, cases where the “services”
are initiated by human choice (e.g., extraction of mineral resources, cultivation of crops, husbandry of
animals); and at the other extreme, cases where human agency can exercise little or no direct control
over the level and quality of “services” (e.g., climate and habitat conditions, rainfall onto productive
land). At this latter extreme we have, on the one hand the relatively stable and predictable ‘permanent’
features such as gravitation and sunshine and, on theother hand, the important ‘wild’ features of nature
that are not controlled by human agency but upon which we depend — including (among others) natural
climate change, rainfall and temperature variability, and all sorts of “Acts of God” (cf., O’Connor 1989,
1993, 1994, 1999 for discussions of the reasons why economic processes and environmental
processes are qualitatively different in this regard). Our main challenges for environmental degradation
accounting arise for classes of ‘wild’ assets and services whose character and significance for human
well-being arre complex, partly independent of human agency and only superficially known. We can, with
contemporary technology and demographic scale, now significantly influence the quality and/or
quantity of many services (e.g., climate change, biodiversity loss) but, impact is not the same as mastery
and, overall, we have little control over the cumulative outcomes of our actions.
15 For example, even in a rather clear case of a specific air emission, the effect on the ambient
concentration of that substance in the air usually is not simple to estimate, and may depend
significantly on atmospheric factors that are highly variable from time to time. We return to this key
feature of system complexity and statistical quality in sections 4 and 5 below, as a basis for assessing
the prospects and limits for monetary valuation of the different categories of asset changes and of the
various flows.
15
•
There may be cases where a pressure or an expenditure may have a significant
effect on more than one asset. So, within the overall 3-D array, there is also —
implicitly — a sub-matrix [type of pressures] by [type of assets] that displays the
incidence pattern of pressures on the environment. This incidence pattern is first
of all important to see at a qualitative level, within which framework there may be
attempts at quantification for specific types of pressures and effects.
•
The same considerations hold for the relationship between changes of quality of
environmental assets and the levels of the related environmental services. While
for some aspects of asset and service quantity and quality (and change) a
quantitative empirical relationship might be established, in most cases it will be
credible to propose an assignment only in qualitative terms, or with orders of
magnitude (e.g., consequences of greenhouse gas emissions into the
atmosphere).
This is why, in our proposed SEEA framework for environmental degradation (and
improvement) accounts, SNA principles are retained for the concept of integrated
asset/flow accounting, but methodological priority is accorded to compiling ‘hybrid’
accounts in a disaggregated way with multiple metrics before attempts are made at
monetisation and aggregation.
3.8 A full exposition of the multi-dimensional accounting array that corresponds to
these suggestions, requires several different tables and various illustrations. Included
among the many 2-D sub-tables (or 3-D matrices) are:
•
[Economic sectors] x [Pressures generated]; 16
•
[Pressures from Economic sectors]
[Environmental Service types];
•
[Economic sectors] x [Environmental expenditures engaged];
•
[Environmental Expenditures] x [Environmental Asset classes] x [Environmental
Service types];
•
[Environmental Asset classes] x [Environmental Services furnished];
•
[Environmental Services furnished] x [Economic sectors]
x
[Environmental
Asset
classes]
x
Figure 8: Environmental Asset Classes and associated Types of Services
Environmental Asset
Category of Environmental functions/services to the Economy
Extract Nat
Resource
Sink
Site
999
(contamination)
?
1
Sub-soil assets
0
Land Surface
2
Soil
(erosion)
999
3
Biosphere/diversity
999
(indirectly)
4
Fresh Water
999
999
5
Marine environment
999
999
6
Climate system
7
Air quality
999
In situ
appreciation
999
99
(area)
999
999
999
99
(area)
99
999
99
(area)
99
999
999
(?)
999
LifeSupport
999
(?)
999
16 The relationship between individual types of pressures (both ‘direct’ and ‘indirect’ ones) and economic
activities is treated elsewhere in the SEEA manual (e.g., for material flows), notably in the format of
supply and use tables.
16
We show, in the tabular format above (see Figure 8), a sketch of the likely incidence
pattern for the entries in one of these tables, that of [Environmental Asset classes] x
[Environmental Services furnished]. This is constructed, pro forma, using the Asset
classification and Environmental services typology proposed above. It thus gives a
primitive schema for identification of Environmental services as ‘flows’ associated with
specific Environmental Asset Sectors.
Figure 9: Inventory and Aggregation Steps for Integrative Economy-Environment-Flow
Accounts
Step/Task
Key considerations in SEEA Environmental Flow Accounting
(A). Disaggregated
Economy-environment
Flow Data
(Hybrid Indicator
Catalogue)
For each interface [Econ Sector]/ [Env Sector], a catalogue of
indicators can be established relating to the ‘flows’ of: Pressures
imposed, Expenditures made, and Services (or nuisances) received,
relating to each category of Environmental Services.
Notes: In this first step, the links between ‘flows’ and ‘stocks’ are
established in ‘hybrid’ indicator terms, viz., by making explicit, for
each class of environmental asset, the links between the ‘flows’ of
expenditures and pressures (from economic sectors to the
environment) and of services (from the different asset ‘sectors’ of
the environment) and environmental asset quality/quantity change.
These linkages will, in many cases, be characterised by
uncertainties, but the framework within which indicators are
managed is more important than perfect measurement. The
“accounts” are periodic; but the descriptions of the pressures,
expenditures, etc., can, with appropriate data management
frameworks, signal multi-period consequences subject to
uncertainties, etc.
(B). From Indicators to
Inventories:
Disaggregated
Economy-environment
Flow Accounts
The attempt can be made, for each interface [Econ Sector] x [Env
Sector] x [Environmental Services], to ‘rationalise’ the catalogue of
indicators into an inventory, and to express the flows information in
‘standard’ measurement units (e.g., physical units such as mass
and energy). To the extent that flows can be quantified in
commensurate units, and that double counting (etc.) issues can be
resolved, it is possible to speak of ‘accounts’ at the disaggregated
level.
(C). Aggregated
Economy-environment
Physical Flow accounts
It must be determined, for each class of economy-environmental
flows, whether aggregation across economic sectors, across
environmental asset types, or across environmental service types is
possible (existence of common units, adequacy of the inventory
process, resolution of double counting problems, etc.) and
pertinent for decision support.
(D) Monetary valuation
of economyenvironment flows
It must be determined, for each class of flows (pressures services,
etc.), whether there can be meaningful and pertinent estimates of
monetary values, and with what sorts of frameworks for estimation
(e.g., so-called ‘supply side’ methods estimating costs of
maintaining or respecting norms for services, functions or asset
quality; or so-called ‘demand side’ methods estimating flows of
benefits or damages).
(E) Defining and
estimating Adjusted
Monetary Aggregates
Once a clear view has been established of the scope for meaningful
and pertinent estimates of monetary values, conventions may be
defined for which of these components of economy-environment
flows shall be made the basis for so-called ‘environmentally
adjusted’ monetary aggregate indicators of national income or
societal welfare. There are several different types of adjusted flow
aggregates that, depending on the context, can have policy
relevance.
3.9 In a first approach to integrated periodic environmental-economic accounting, it
would be sufficient to list, within each cell, those specific ‘services’ or ‘environmental
functions’ considered to be significant for a nation’s economic activity and some sort
17
of index of their importance or magnitude. Then, looking the other way across the
interface, complementary tables (not shown here) would list the ‘Pressures’ generated
from each Economic sector towards the environment, and attribute these pressures to
specific Environmental asset classes and to the related Environmental services. An
analogous procedure is then required for Environmental Expenditures.
In this way, an integrated accounting framework for environmental degradation (and
improvements) will specify the three types of ‘flow’ transactions on the interface of
each Economic sector (or for the Economy as a whole if aggregated) with each
Environmental asset sector, thus permitting the correspondences between ‘Pressure’
and a ‘Service’ to be established at the level of each interface.
We have already portrayed this classification framework as a 3-D array illustrated
schematically in Figure 4, that is, the classification of flow information with reference
simultaneously to [ECON sector] x [ENV asset class] x [ENV Service type]. The cell-bycell periodic flow “accounts” are built up by complementing the entries for
‘Environmental service to’ economic sectors, with appropriate entries for ‘pressures
from’ and ‘expenditures from’ each economic sector towards the environment
(attributed to a specific Environmental asset and to a specific type of service). On the
basis of this cataloguing process, which generally will give rise to a system of ‘hybrid’
indicators in heterogeneous physical and monetary units, it becomes possible to
appraise, for each class of economy-environmental flows, whether and to what extent
aggregation across economic sectors, across environmental asset types, or across
environmental service types is possible (existence of common units, adequacy of the
inventory process, resolution of double counting problems, etc.) and, whether and to
what extent this aggregation is pertinent for decision support. We present the key
steps of this procedure in Figure 9. Through this appraisal and accounts compilation
process, progressively from disaggregated indicators towards monetisation and
towards aggregation, the question of information availability (supply side) is interfaced
with the question of need (social demand).
4.
Prospects and Limits for Measurement and Monetary
Valuation
4.1 How far, then, can monetary valuation help us in our information and policy goals
of environmental degradation accounting? This leads us to all sorts of derivative
questions, like: (1) how significant is the ‘degradation’ or damage to the
environmental asset? and (2) is expenditure justified in order to avoid the degradation?
The SEEA 2003 notes the existence of a spectrum of measurement and valuation
difficulties that are obstacles in the way of comprehensive accounting of
environmental degradation in a national accounts context. In effect, Chapters 9 and 10
of the SEEA 2003 are somewhat caught in the dilemma of, on the one hand, the clear
importance of a systematic portrayal of environmental degradation and, on the other
hand, the clear impossibility of achieving such an accounting respecting the statistics
quality standards and rigorous classification conventions associated traditionally with
the SNA.
The only way to get beyond this dilemma, while adhering to coherent principles of
statistics quality, is to accept some carefully constructed adaptations to classification
schemas, valuation practices and aggregate indicator definition (and policy uses) that
take account of the specific features of environmental assets and services as ‘outside’
the human production sphere, and to accept some corresponding modifications to
statistical quality standards that take account of the intrinsic observation,
classification and measurement complexities of environmental systems.
4.2 It has been emphasised that, very often, the entries in the flow accounts — and
also, perhaps even more so, in the asset (or asset change) accounts — will be of
18
heterogeneous character, subject to large uncertainties, and open to reappraisal
based on new insights and information. For each category of Pressure or Environmental
service (etc.), fundamental questions arise of measurability of the flow (and, by
extension, of the associated environmental assets or changes in the assets; see 5
below). A simple and pragmatic typology of measurability can be proposed as follows:
[I]
No metric (qualitative information),
[II]
Multiple metrics (with physical or hybrid indicators),
[III]
Money metric (monetary valuations).
This typology of measurability is deliberately very simple. It has a number of
applications for deciding where to place a “Monetisation Frontier” for
economy↔environment flows and, by extension, for assets/stocks accounts (see
paragraphs below). 17
4.3 Consider again the tabular layout in Figure 8 of the Section 3 discussion of flow
accounts. We have chosen to order the rows and columns of the [Asset class] x [Service
type] table so as to illustrate the notion of a “Monetisation Frontier” in a synthetic way
(see Figure 10). In particular, we have placed the Asset/Sector class ‘Sub-soil assets’
at the top (No.1), and the Service/Pressure category ‘Extraction’ on the left. As a rule of
thumb, meaningful monetisation of the value of Services, and also of the impacts of
Pressures and Expenditures, becomes more and more difficult moving from left to right
across the table, and moving from top to bottom down the table. This is suggested very
schematically with the dashed diagonal curve across the table.
The formal question being posed here is: which categories of Economy↔Environment
flows should be accounted in money units, and which not? From a scientific and
statistics quality point of view, this has to receive a response case by case, based
partly on knowledge about the properties of the environmental systems concerned,
and partly on the institutional and policy contexts determining uses of qualitative,
quantitative and monetary information.
•
For example, within the table of Figures 8 and 10, the cell for [natural resource
extraction x Sub-soil assets] could plausibly be attributed the metrical status [III],
meaning these flows are easily and meaningfully monetisable.
•
By contrast, the cell for [Life support x Climate system] might be attributed the
status [I], meaning that the importance of climate for economic activity and
societal well-being is qualitatively well recognised but very difficult to quantify.
4.4 Monetary valuation data is multi-layered and there are many different commercial
as well as public policy roles for monetary valuations, at widely differing scales. It is
necessary to distinguish clearly the possibility of obtaining monetary valuations for
individual items of environmental benefit and damage (e.g., in a project evaluation
context), from the questions of aggregation for producing monetary indicators at
macro-economic scale.
17 The Monetisation Frontier concept and its applications to environmental accounting procedures are
presented in O’Connor (2000, 2001, 2006). See also Sections 5 and 6 below.
19
Figure 10: Localisation of the Monetisation Frontier for Environmental Services
Environmental Asset
1
Sub-soil assets
0
Land Surface
2
Soil
3
Biosphere/diversity
4
Fresh Water
5
Marine environment
6
Climate system
7
Air quality
Category of Environmental functions/services to the Economy
Extract Nat
Resource
Sink
Site
In situ
appreciation
LifeSupport
SOURCE
SINK
SITE
SCENE
SUPPORT
There are many situations where high quality monetary figures may be available for
specific items in the ‘flow’ accounts, without robust aggregate monetary estimates
being possible for economy-environment flows (for the [Econ-sector] x [Env-sector]
interface considered) or asset change (for the environmental sector(s) concerned).
Examples include:
(a) money payments for ‘rights’ or ‘permits’ to emit pollutants (e.g., GHGs) or to
deposit wastes (e.g., high activity long-lived radioactive residuals), or to extract
biological resources where the harvesting activity is known to provoke damaging
environmental changes but where the future significance of these changes is difficult
to quantify;
(b) soil productivity losses due to specific pressures such as chemical contamination;
(c) societal welfare losses due to specific service losses (e.g., health care costs or
losses of working days due to effects of air pollution).
4.5 In composing the ‘flow’ accounts, we have to be clear about what an item of
monetary data is signalling or measuring. In a didactic way, it is useful to distinguish
three fundamentally different angles of attack.
•
The first is that of “polluter pays”, where there are money payments such as a fee
or permit per unit of a pressure caused [as in example (a) above], but the levels of
payment are determined ‘politically’ without necessarily having a close correlation
with scientific estimates of the (money value) of the damage caused by the
pressure. 18
•
The second is where data exists, or can be estimated through modelling and other
econometric techniques, for the economic (monetary) costs associated with
reduction in environmental pressures [for example, reduction of chemical
residuals in agricultural soil and groundwater, as in example (b) above]. This
corresponds to ‘supply side valuation’, where what is quantified is how much it
might cost, in terms of expenditures of economic resources (hence, loss of income
elsewhere), to avoid the asset degradation that is caused (or affirmed to be
caused) by the pressure, or to restore the environmental service capacities through
reduction of certain pressures. However, rather evidently, while this constitutes a
‘supply-side’ money valuation of the asset change due to the pressure that is really
18 The “value” of the pressure/service is not directly correlated with the payment. In this sense, “the
polluter” does not pay the “full costs”; but also there can be big divergences in estimates of what might
be this “full cost”.
20
or hypothetically avoided, it does not constitute a direct money valuation of the
‘damages avoided’ or ‘benefits obtained’ in terms of improved environmental
services.
•
The third case, sometimes called ‘demand side valuation’, is to seek to quantify
the money value of environmental asset change (e.g., degradation) by imputation,
in terms of the damages — or losses of benefits (economic production, amenity,
etc.) — relative to the situation if the degradation of the environmental asset(s)
had not taken place [for example, losses in productivity and in amenity and welfare
due to poor health of the members of a society caused by air pollution, as in
example (c) above]. This approach to asset change valuation is not always
straightforward because it requires to identify and place a monetary value on all
significant changes in benefit flows not just for the current accounting period but
for all successive periods. This raises problems of coverage, of uncertainty, of
discounting, and so on. 19
4.6 Ideally, these three cases can be considered as complementary and not exclusive.
They are three different “angles of attack” for valuation of environmental services and
environmental pressures, and for making estimates by imputation for monetary value
of asset changes. Thus for example, demand-side estimates of the ‘damages caused’
by an air pollution pressure, can be compared with supply-side estimates of the
‘avoidance costs’ for the same pressure; and these two figures can be compared with
the real-life fee or price paid by the polluter. But this does not mean that the road is
clear for producing tidy monetary asset change flow accounts! There are two persistent
sources of pain:
•
First, these three sources of money valuation data figures are logically distinct and
will not, in general, coincide. 20
•
Moreover, it is generally possible to produce widely varying figures for demandside estimates of the same situation, and for supply- (or cost-) side estimates of
the same situation, as a function of the methods adopted and the parameters or
other conventions employed. 21
These two points taken together, mean that it is quite illusory to hope for ‘best
practice’ conventions that can ensure the production of monetary flow accounts for
environmental pressures and environmental services responding to traditional
statistics criteria of coherence and ‘reliability’. This does not mean that no efforts
should be made to produce monetary valuations. What it means is that (1) new
19 In many cases, the damages caused by utilizing the environmental function in a specific period and
within a specific territory, are widely dispersed elsewhere (e.g., it may reduce the productivity of another
branch or the health condition of humans, it may occur outside the national territory) or across time
(consequences in one or many later periods). The cross-boundary aspect is directly important for
national accounts, relating to the costs caused/costs borne distinction (see O’Connor 2001 and also
Muradian and O’Connor 2001).
20 This point is quite obvious from a theoretical standpoint, but is sometimes neglected. It is explicitly
signalled in the SEEA 2003, chapter 9, notably section 5 on Problems with valuing degradation, e.g.,
paragraph 9.19 “There is no assurance that the cost-based and damage based estimates will be equal
because the market mechanism to juxtapose them is missing but either or both approaches may be used
depending on the focus of interest”. But it is not so clear in the SEEA 2003, what are the consequences
of this (important) point for the organisation and use of the environmental degradation accounts.
21 Comparisons of ‘supply side’ and ‘demand side’ figures are hazardous, because one may not be looking
at exactly the same set of processes and effects. Only if the “full spectrum” of damages caused by using
a specific type of environmental asset is addressed, can these “damage costs” be allocated back to the
economic activities causing the trouble (e.g., by using the shares in the physical pressure flows), as
useful information to be compared with maintenance costs. For ‘demand side’ valuation of damages due
to a pressure, the first step would be to find out to what extent there is decrease of a specific type of
environmental service on a given territory in a given period, then extending the analysis by including the
cross-time (multi-period) and cross-boundary (multi-country) effects. If this is done in physical terms,
e.g., what amount of ambient concentration of a certain type of air emissions has occurred or will occur,
and to whom (economic branch, private household, etc.), there is a clearly defined system basis for
estimating the damages in monetary terms. But, there can be controversy about the inventory of
services, and about the severity, distribution or duration of the changes. Also, there may be “intangible”
service flows that can, if at all, only be measured directly in monetary (for example by contingent
valuation approaches), but not in physical terms. It is a complicated field of analysis.
21
conventions are required to assess, monitor and communicate statistics quality in this
field; and (2) care is required about the uses of different sorts of monetary valuation
data.
•
The ‘supply-side’ approach has the advantage, from a scientific and statistical
point of view, that it is based directly on data for economic costs and pressures
found within the national accounts. However, the values are not raw data, they are
obtained on the basis of various methods of econometric estimation and/or
modelling, depending on the scales and purposes of the estimation. Also, as
mentioned above, it estimates the costs of achieving a performance goal; it does
not constitute a direct money valuation of the ‘damages avoided’ or ‘benefits
obtained’ in terms of improved environmental services.
•
The ‘demand-side’ approach to estimation of “benefits/damages” relating to
specific services or nuisances has the advantage, from the standpoint of economic
cost-benefit analysis, of seeking to obtain a figure for the “value of the
benefits/losses” to the economic agents directly concerned. But the figures
obtained necessarily depend on the spectrum of benefits/damages addressed,
and on a variety of methods of “revealed preference” or “contingent valuation”
that engage various supplementary hypotheses (sometimes controversial) on top
of the accounts data basis.
Thus, the ‘demand-side’ and the ‘supply-side’ approaches to valuation of ‘flows’ and
asset changes each have distinctive strong points, and limits, in the face of intrinsic
difficulties of providing decision support concerning environmental asset quality and
changes. 22 From an accounts user’s point of view, the question is, what we really want
to measure and why.
4.7 Project level analyses can be an important context for use of SEEA data.
Nonetheless, a major focus in the SEEA is not with individual items, but for complete
classes of assets or flows, as this is the sort of aggregation that is engaged for
estimating ‘environmentally adjusted’ macroeconomic performance indicators.
Direct valuation of environmental asset stocks or asset change during an accounting
period, is rather problematical if not impossible for most asset classes. Usually, the
attempt is made to estimate asset change indirectly, by imputing a value (or change in
value) to the asset on the basis of monetary values for the environmental service flows
(or changes of environmental service flows) coming from the asset. This procedure
runs straight up against the difficulties summarised above. We will discuss these
issues for each environmental asset class individually, in Section 5 below, before
turning in subsequent sections to recommendations for adjusted aggregate estimation
concepts and practice.
5.
Linking Stocks and Flows for macroeconomic
performance assessment
In this section we summarise, for each Asset class, key considerations about
measurement and monetisation of flow and asset accounts, and their implications for
assessing economy-environment change in an integrated way (including, but not
limited to the macroeconomic indicator ‘adjustment’ question). This leads, as we will
outline below, to a well-structured multiple criteria framework for assessing macroeconomic performance.
22 A synthetic exposition covering most of these points is found in “Ways and Means of "Pricing" the
Environment”, included as an appendix to the paper “Paradigms for Sustainability Assessment:
Inventory of Costs and Benefits versus Representative Diversity of Indicators”, prepared by Martin
O’Connor in support of the SEEA 2003/2010 Reform Process, for the meeting of the London Group in
Johannesburg, March 2007. (This annex material was originally prepared as an input to the drafting
process leading to the SEEA 2003).
22
5.1 SUB-SOIL RESOURCES. The main category of ‘pressure/service’ associated with this
Asset class is ‘extraction’ which, if the resource is non-renewable, leads directly to
depletion. As discussed in the SEEA 2003 (Chapter 10 point 10.38 infra), referring
back to the SEEA 2003 chapter 7), if the depletion is measured and there is a money
price attached to a unit of the resource, it is straightforward to define depletion
adjusted savings and depletion adjusted national income by following wellestablished recipes.
5.2 SOIL ASSETS AND LAND. Productive land and, hence, soil as a sine qua non of this
productivity, is systematically treated by the SNA/SEEA_2003 inasmuch as this land is
inventoried as an economic asset. However, land/soil quality is not invariant, and — as
is increasingly recognised in terms of ‘multi-functionality’ of agriculture and forestry —
landforms and soil quality can have significance for human welfare and economic
functioning via other service categories such as landscape quality, recreational uses,
moral/aesthetic appreciation, and life-support (often in complex indirect ways, such as
hydrological dynamics and roles in cycles bearing on climate and atmosphere
composition, etc.). Not all of these ‘values’ are captured in market transactions, and
the experimentation of regimes of fees (etc.) linked to soil/land qualities are only in
their infancy. So the accounting challenges for land/soil in the new SEEA are
somewhat analogous to those for biodiversity, namely: (1) in relation to the
complexities of soil ‘services’ and their improvement or degradation relative to valued
products; and (2) the ‘non-market’ values of soils.
The London Group in its 2007 meetings (Johannesburg in March 2007; Rome in
December 2007) has reiterated the importance of an improved treatment of soil assets
in the new SEEA. However, there is also an acceptance, in the London Group and
elsewhere, about measurement difficulties for soil values. 23 It cannot be assumed that
attention by agronomists, economists and statisticians (etc.) to this challenge will lead
quickly to the statistics base for a “soil asset adjusted national income”. Although
many countries have data on productive soil loss (e.g., due to urbanisation, transport
infrastructures, erosion) and/or quality degradation (e.g., salinisation or other forms of
contamination), often this is incomplete and, given the multiple functions of soil and
land cover, this information is, at best, in multiple metrics. Therefore, such data on soil
asset changes (e.g., expenditures for soil retention or improvements, fees associated
with soil uses) and on benefits to society from soil quality cannot easily be aggregated
to obtain a ‘net change’ in soil asset value.
5.3 NON-PRODUCED BIOLOGICAL RESOURCES. The ‘Biodiversity’ sector has multiple functions
and, by corollary, may be depleted and/or degraded in many different respects. As
regards ‘extractive’ uses, and as highlighted in the SEEA 2003 Chapter 10 (points
10.42-51), the change in [physical] stock level at the end of a period is the difference
between ‘extraction’ (reducing the stock) and ‘natural growth’ (regeneration of the
stock). Further, there may be qualitative as well as quantitative changes in the asset,
and, it can become rather speculative to estimate the ‘opportunity cost’ of the asset
depletion or degradation (e.g., significance for future stock levels, regeneration rates,
hence availability), as is needed — in principle — to estimate the value change in the
stock. 24 But beyond this, there remains the question of the contributions of ‘Nonproduced Biological resources’ to human welfare and economic functioning via the
other service categories such as landscape quality and moral/aesthetic appreciation,
and life-support in complex indirect ways. So, estimating a net asset change in
23 See also the set of points raised concerning soil assets in the paper “Issues Related to Valuation”
(UNCEEA_2_12) prepared by the World Bank for the UNCEEA meeting at New York in June 2007; and the
contributions by Jean-Louis Weber on Soil Asset accounting to the London group meeting at Rome in
December 2007.
24 This complication is noted by the SEEA 2003 10.51 with the example of fish population dynamics,
although there is not a discussion of the consequences for statistics quality (due to uncertainties, etc.)
in the ‘adjusted’ accounts.
23
monetary terms for a nation’s Non-produced Biological Resources does not look like a
straightforward exercise, and the figures obtained are likely to be highly debatable. 25
5.4 “CONTINENTAL” (FRESH) WATER ASSETS. Water accounts are the object of detailed SEEA
work (http://unstats.un.org/unsd/envaccounting/seeaw.asp). There are both
quantitative and qualitative aspects to water use and degradation. From an accounting
(and policy) point of view, it might be tempting to try to isolate the components of the
Hydrosphere that are the object of ‘extraction’, from those implicated in (for example)
complex ecosystem and climate processes. In this way, a “water asset depletion
adjusted national income” could be proposed. However, even if the accounting base
can be agreed, such a procedure is likely to have only limited policy interest. First of
all, there is controversy over what should be the ‘price’ for a unit of water (viz., the
debate about the relation between pricing of water in reality, and theoretical concepts
of opportunity cost, and sustainability norms, etc.). Second, the separation between
‘extractive’ and other values proves impossible in many cases. There are, indeed,
many measurable pressures initiated by the Economy on Water assets whose
consequences for water quality and availability, and also for other environmental
assets are (i) multi-period, (ii) difficult to quantify, and (iii) of uncertain significance. So
accounting of changes in water asset quantity and quality is associated with the
standard difficulties of (1) system complexity and (2) a wide diversity of ‘functions’ or
services whose short and long-term significance for human societies is difficult to
evaluate.
5.5 MARINE WATER RESOURCES. This category of environmental assets is, from a
measurement and dynamics point of view, in some respects akin to SUB-SOIL RESOURCES
(e.g., as regards extraction of minerals), but more fundamentally akin in complexity to
the CLIMATE SYSTEM and also, in some important respects, linked to BIODIVERSITY. This
environmental sector has growing economic and political importance, but we do not
further discuss it here.
5.6 CLIMATE SYSTEM CHANGE. Our planetary climate system is an “asset” in much the
same way as a house is. If the house burns or rots, it does not provide the conditions
of comfort (etc.) that previously were associated with it. In this sense our climate
system can de damaged, degraded. Is it possible to envisage a “climate change
adjusted national income” calculation? The response is, as for other classes of
environmental degradation, that formally this can be envisaged but care is required as
to the interpretation of and use of any quantitative results.
Attempts have been made for more than 20 years (with precursors dating back 200
years) to estimate consequences for future economic activity of anthropogenic
greenhouse gas (GHG) emissions. Depending on the systems dynamics modelling
assumptions, and also on the economic evaluation conventions (including the famous
discount rate question and the choice of attribution on a ‘costs borne’ or ‘costs
caused’ basis), the outcomes of such exercises can vary by (at least) an order of
magnitude. In short (and simplifying), the ‘adjustment’ might be estimated at (say)
0.3%, 3% or 30% of a country’s GDP. 26 It does not seem very helpful just to ‘adjust’ a
GDP-type indicator by this sort of “fuzzy set figure” — this lead to a statistics version of
the problem of “horse and rabbit stew”.
This does not mean that estimation in monetary terms of the (future) “damages” due
to anthropogenic GHG emissions does not have any policy relevance, nor does it mean
that (more particularly) such figures should not make up part of the new SEEA. On the
contrary, the “fuzzy set” of GHG-damage estimation outcomes, suggesting the orderof-magnitude of climate change impacts, may indeed be very important data for
25 In addition (as noted in the SEEA 2003), the dividing line between ‘produced’ and ‘non-produced’
biological resources is not black and white (e.g., fish and marine biomass, some forest resources…); and
this is an aggravating feature in the points made above.
26 These figures are for illustration of the argument, not drawn from any specific study. For introductions to
different facets, empirical and theoretical, of the estimation of ‘values’ associated with climate change
see (among others): Edmonds and Reilly (1985); Funtowicz and Ravetz (1994); Muir (1996); Schembri
(1999); Toman (2006); Stern (2007).
24
orienting policy choices. What seems called for within the new SEEA, is a framework for
managing such categories of data — estimations of monetary values associated with
Climate System asset change, among others — and for making available information
about the basis for their calculation and about the different types of uncertainties
surrounding the figures. Users of the SEEA can exploit the “fuzzy set” of estimates in
order to gain insights into the severity of the climate change problem, the character of
the imponderables, and so on.
5.7 AIR QUALITY. Air as an asset is, in some respects akin to SUB-SOIL RESOURCES (e.g.,
extraction of specific elements e.g., N2, noble gases or other types of molecules); in
some respects associated with the CLIMATE SYSTEM (here classed separately); in some
respects linked to BIODIVERSITY; and in some respects akin to SOIL and WATER as matrices
of organic life. The distinctive feature of AIR, evidently, is that we breathe it in
permanence and, therefore, that its quality is “a matter of life and death” on a
moment-by-moment basis.
Air cannot be quantitatively depleted, but it can be qualitatively modified, with
sometimes far-reaching consequences. Notably (apart from climate change and the
other ‘global’ atmospheric issues such as stratospheric ozone depletion), the term “air
pollution” is linked with health problems and ecosystem damage.
•
In a systems perspective, air pollution (smoke, vehicle emissions) constitutes
“degradation” of the Air asset, which results in a reduction in services (or, indeed,
in outright nuisance) from this Environmental Sector.
•
This reduction in services or nuisance, impairs the comfort and biological
functioning of affected persons and other flora and fauna, in acute cases leading
to sickness, disability and death. An example of major importance since the 1970s
is “acid rain”; and another example of current topical interest is PM10s. 27
•
In effect, the air is an Asset that also acts as a vector for transmitting nuisances. In
the case of acid rain, there is resulting degradation of Water, Soil and Biodiversity,
with various consequences for human welfare and economic production. In the
case of PM10s, if human health and longevity are considered as attributes of
Human capital, then it can be said that the degradation of Air quality (as an
Environmental sector) has an impact on the “stock” of Human capital.
•
These pollution impacts can be quantified and — with a variety of evaluation
conventions (some of which are controversial) given monetary estimations. By
“capitalisation” of the impacts over time (e.g., calculation of a ‘net present value’
of the damages, with conventions for discount rate, uncertainties, etc.), it is
possible to impute a money value for the natural or human capital
degradation/depletion resulting from pollution.
This sort of procedure could, in principle, be made the basis for an “Air pollution
adjusted national income” figure. 28 But once again (cf., remarks above concerning
CLIMATE SYSTEM and WATER), in order to judge the usefulness in analysis and policy of
this sort of procedure, careful reflection is required concerning several points of
statistics quality and accounting conventions.
It is agreed by all contributors to the debates about “damage adjusted”
macroeconomic aggregates, the figures obtained are sensitive to the methods
employed for estimating [imputing] the asset value changes. For the present case of air
pollution and health damage, we illustrate with citation from the World Bank’s (2007)
paper “Issues Related to Valuation” (UNCEEA_2_12), in Figure 11, they conclude: “One
27 PM10s are micro-scale particles produced in certain combustion processes (such as motor vehicles,
some types of open fires/stoves…), recognised as a source of respiratory and related health problems
for those breathing in the emissions.
28 By adopting the same line of attack for health consequences of Water (etc.), one could arrive at further
contributions to a “Health damage adjusted national income”. This procedure, which entails subtracting
“pollution damage to human health” from NDP, is outlined as an option in the SEEA 2003, chapter 10,
points 10.145 to 10.152.
25
issue is how to value human capital, in terms of productivity or willingness-to-pay. The
approaches can differ by a factor of five and it is not clear which is correct.” 29
Figure 11:Valutation Issues for Air Pollution and Health Damage
Issues concerning valuation of environmental degradation raised in the The
World Bank’s paper “Issues Related to Valuation (UNCEEA_2_12) prepared for
the UNCEEA meeting at New York in June 2007
a. Most damage from pollution, including loss of amenity values from air
pollution, is already included in the SNA in production and asset accounts.
But that damage is not explicit. There are definite policy advantages to
making damages explicit.
b. Some pollution damages may not be fully included in the current national
accounts because at least part of their impact occurs far in the future (e.g.,
greenhouse gas emissions (GHG)), and sometimes also in territories other
than the one responsible for the pollution. The current value of such damages
(the discounted value of future damages) is difficult to estimate, but, at least
in the case of climate change, is of increasing public concern. A market for
rights to emit GHG has developed and the prices established could be
considered a measure of the value of pollution.
The treatment of pollution permits is also raised under issue 8 in the minutes
of the London Group meeting. The permits can be viewed as a property right
and the transactions establish the value of that right, but the SNA is treating
transactions as taxes. The permits are paid for by the polluter, not the territory
which will suffer the damage. This contrasts with the SNA which implicitly
records damage in the territory where and when it occurs, not at the source
and time when pollution is generated. Alternative treatment in the SEEA
should be considered.
c. Damage to human health is not included in the SNA. Damage to human
health can be added if health is thought of as an aspect of human capital.
One issue is how to value human capital, in terms of productivity or
willingness-to-pay. The approaches can differ by a factor of five and it is not
clear which is correct.
5.8 AN INTERIM SUMMING UP. The above discussion highlights that, in any procedure
of (1) estimation of monetary values associated with environmental services flows and
environmental asset changes and (2) aggregation of these estimations to compile
synthetic monetary indicators such as an “environmentally adjusted national income”,
the figures obtained will be highly sensitive to (i) the categories of assets and asset
change/damage included and, accessorily (ii) the methods employed for estimating
[e.g., imputing] these asset value changes.
For most of the classes of Environmental Asset discussed — the only clear exception
being SUB-SOIL RESOURCES — it seems illusory to envisage a single standardised
procedure that can produce a meaningful estimate of change in monetary value of the
nation’s assets in a periodic accounting system. This does not mean that accounting in
monetary terms for Economy-Environment flows and for Asset quality and quantity
changes should not be pursued. Our conclusion, rather, is that integrated
environment-economy accounting should be pursued in a structured way for each
29 In passing, this raises the question of the status of human health, and of Human capital as an asset
class, in the national accounts — and, more particularly, in the new SEEA. To what extent does the
UNCEEA need to interface with other SNA agencies on this point? This question has practical importance
for, among other things, the definition and estimation of transversal performance indicators taking into
account so-called social capital as well as human capital and natural capital.
26
Asset class on the basis of hybrid accounts (viz., accommodating both monetary and
non-monetary data sets).
In sum, there are several successive challenges for aggregation and monetisation of
environmental asset changes and economy-environment flows. 30 In conclusion we
suggest that assessment of macro-economic performance can most appropriately be
organised as a “multiple bottom line” problem, by profiling performance for each Asset
class using appropriate monetary and non-monetary indicators (this idea is illustrated
in Figure 12). The primary features of the periodic accounts for Environmental Asset
quality and quantity will be non-monetary indicators of asset state and change
(without excluding the imputation of monetary values for some components of assets
and asset change), these asset accounts being complemented by hybrid (mixed
monetary and non-monetary) Economy-Environment flow accounts covering
environmental Expenditures, Pressures and Services.
Figure 12: Environmental Assets and Multiple Bottom Lines
Economic Performance
(Savings, Income)
Human Capital
Formation
Sub-Soil
Assets
Air
Quality
Climate
System
Soil
Assets
Biodiversity
Oceans & Marine
Environment
Fresh
Water
resources
The Facets of Macro-economic Performance Assessment
in an Integrated Multi-Criteria Perspective
6.
“Adjusted” Macroeconomic Performance Indicators
6.1 The original ambition behind the definitions and estimations of environmentally
adjusted GDP and NDP figures since the 1980s was to furnish guideposts to policy,
helping to chart national economic development paths and to evaluate trade-offs
between output growth, final consumption and environmental performance objectives.
This ambition is maintained in the SEEA 2003 (see Figure 13, citing SEEA 2003 point
10.161), and this needs to be highlighted again in the new SEEA. Nonetheless, there
has been a lot of experience gained during the past 20 years about conceptual and
measurement challenges for producing policy-relevant adjusted national income
figures.
30 We try to sum up these challenges, along the paths from hybrid indicator catalogues to adjusted
aggregates, in a schematic way, in Figure 14, at the end of the paper.
27
With the benefit of this experience, two main concepts have emerged for defining
‘environmentally adjusted’ macro-economic indicators for a national economy
(O’Connor, Steurer and Tamborra 2000; O’Connor and Steurer 2006).
•
Extended asset concept: The first type is based on a change, relative to SNA
conventions, in the set of assets to be included in the stock accounts, and hence
asset changes/flows to be factored in to the “adjusted” national savings and
income estimations. There is an enlargement of the scope of national accounting
to include specified categories of environmental assets within a single basket for
which “adjusted aggregates” are defined and estimated. In effect, this shift brings
some environmental capital (such as minerals, oil and gas, forest or fisheries
stocks and flows) into the field of conventional economic stock/flow accounting,
e.g., the AICCAN concept. 31 In the case of the ‘GENUINE SAVINGS’ concept developed
by the World Bank, the enlargement also includes adjustments relating to Human
capital (e.g., health damages) alongside certain categories of Natural capital.
•
Greened Economy: The second type of adjusted aggregate is obtained on the basis
of [hypothetical] adjustment of the economy itself, that is, an ‘adjusted economy’
with a new pattern of production processes, levels of production and consumption
activity, technologies employed, etc., which respects specified environmental
performance standards. In this procedure, there is explicitly constructed a
framework of multi-criteria evaluation, where the focus is on the interfaces
between the economic system and its environment [composed of several asset
classes or ‘Sectors], which are ‘crossed’ by environmental pressures/services and
expenditures. The corresponding aggregate indicators are ‘greened economy GDP’
(geGDP).
6.2 These two adjustment concepts are complementary not exclusive. They address
the overarching question of investment (or dis-investment) in natural capital from
different points of view, and they apply distinct valuation concepts for the relevant
components of natural capital (that is, environmental assets in the language of the
SEEA). As long as appropriate attention is given to complementarities and to boundary
definitions, it is not a question of preferring one or the other: both concepts can and
should play major roles in structuring environmental policy and supporting statistics
(see also Figure 13).
Figure 13: Adjusted Aggregates in the SEEA
From the SEEA 2003 10.161: “Obviously, the figures for both damage-adjusted
income and damage-adjusted saving are sensitive to the categories of asset
included. It is essential, in order to avoid misunderstandings, to have a clear
presentation of what is, and is not, included in the set of economic and
environmental assets being considered. What is or should be included in a
country’s damage-adjusted income may be determined by the circumstances of
what is deemed most important or what it is feasible to estimate. As the set of
assets includes changes, then the “damage adjusted” aggregates will change. In
particular, attempts to include climate change, biodiversity, land cover change or
other aspects of environmental services not yet monetised, might be key cases
where there could be very fruitful explorations of the SEEA 2003 framework….”
6.3 As the SEEA 2003 discusses at some length, in Chapter 9 and again as an
undercurrent of Chapter 10, the important distinction is made between “cost based”
and “damage based” environmental valuation procedures.
31 AICCAN is the terminology proposed by O’Connor (2000, 2001; see also O’Connor and Steurer 2006) for
defining and estimating an ‘Aggregate Indicator of the Change, during the Current year, in the economic
Assets of the Nation’. This term was chosen to highlight that (1) an “adjustment” is made in the
positioning of the Economy-Environment system boundary; and (2) some environmental asset classes
and/or some facets of environmental asset change are not encompassed by the AICCAN indicator and
must be dealt with in parallel, for example in a multiple bottom line macro-level assessment.
28
•
Cost-based valuation procedures, which might also be called supply-side
valuation procedures, are those in which changes in stocks (assets) or flows
(services) are valued from the point of view of the economic costs of their
maintenance;
•
Damage-based valuation procedures, which might also be called demand-side
valuation procedures, are those in which changes in stocks (assets) or flows
(services) are valued in terms of monetary figures for losses of economic welfare.
Both the adjustment concepts just mentioned are based on opportunity cost
assessments, but in different ways. The AICCAN/Genuine Savings type monetary
indicators of net national asset change, are based on a monetary aggregation
framework, the changes in environmental assets being assessed from the point of view
of their contributions (actual or potential) to an aggregate monetary measure of
human/societal well-being (national income). 32 By contrast, the geGDP type of
indicator is defined within a cost-effectiveness multi-criteria framework (quantification
of trade-offs between asset classes). The geGDP type of indicator assesses the
significance of each class of Environmental Assets in non-monetary terms, considering
them as complementary to Economic capital — their durability being necessary (or
strongly desirable) as supports/complements for viable economic activity. The geGDP
is an indicator of prospects for maintaining economic asset (and human capital)
development while ensuring the maintenance of these Environmental Assets as
complementary to Economic and Human capital. Thus, in the estimation of a geGDP
indicator, a multi-criteria framework is constructed, within which the specified
environmental assets are, in effect, valued from the point of view of the economic costs
of their maintenance.
6.4 However, in order for the concept of “environmentally adjusted national income” to
be both scientifically robust and pertinent in policy, it will be necessary to agree on
some conventions about where to situate the Monetisation Frontier for asset change
valuation for indicator estimation purposes. In effect, the AICCAN/Genuine Savings
type of ‘ANS’ indicator is based on aggregation on only one side of the Monetisation
Frontier. By comparison, the geGDP type of indicator is based on quantifying a tradeoff between asset classes located on different sides of the Monetisation Frontier. 33
•
Concerning the ANS ‘adjusted net savings’ concept, it is noted by most
commentators since the 1990s (and sometimes by the analysts themselves), the
numbers obtained for ‘genuine savings’ or ANS, and their interpretation, depends
fundamentally on what categories of asset change are included in what ways.
Stabilisation of this concept and consensus about its use and usefulness as an
overarching sustainability indicator requires this boundary definition issue to be
addressed and resolved much more explicitly than has been the case to date, 34
•
The corollary of these remarks is our insistence that some environmental asset
classes and/or some facets of environmental asset change — those that are not
32 For expositions of the ‘genuine savings’ concept and applications, see Pearce and Atkinson (1993);
World Bank (1997); Hamilton (2000); Hamilton and Clemens (1999); Hamilton and Atkinson (2006). On
the theoretical and empirical limitations of genuine savings and associated ‘weak sustainability’
indicators, see Norgaard (1990); Asheim (1994); Faucheux, Muir and O’Connor (1997); Victor, Hanna
and Kubursi (1998); Withagen and Asheim (1998). More recently the term ‘adjusted net savings’ (ANS)
has become current (e.g., CMEPSP 2009), and for simplicity we will adopt ‘ANS’ henceforth in this paper.
33 This corresponds, as discussed by Faucheux and O’Connor (2002) and again by O’Connor and Steurer
(2006), to a demarcation between domains where the ‘Weak’ and ‘Strong’ sustainability precepts are
respectively applied. On the one side, the ‘Weak’ sustainability precepts are applied to those resources
and assets whose permanent maintenance per se is not deemed essential for durable economic activity.
On the other side, the ‘Strong sustainability’ precepts are applied to Environmental Assets whose longterm maintenance is seen as a performance goal or criterion complementary to Economic and Human
capital formation.
34 Also, this requires an interface between SEEA and other agencies responsible for the conventions for
human capital definition and measurement and for ‘social capital’ to the extent that these asset
categories is invoked in the definition of ‘ANS’ type national performance indicators. However we do not
develop recommendations on this point.
29
encompassed by the ANS AICCAN or ‘genuine savings’ indicator — must be dealt
with in parallel, using non-monetary indicators of environmental performance for
each asset class, thus constituting a multiple bottom line macro-level assessment
(cf. the amoeba or kite-diagram format of Figure 12).
For the purposes of the SEEA reform, it is here proposed that this boundary
clarification be attempted for each Environmental Asset class. Scientific knowledge
combined with practical valuation experience to date, allows characterisation of the
different Sectors (or clusters of Environmental Assets and their functions) which, for
the purposes of adjusted aggregate estimation, might be placed, typically, on one side
or the other of the Monetisation Frontier. For example:
•
The AICCAN/Genuine Savings or ‘adjusted net savings’ (ANS) approach can be
useful for issues of quantified SUBSOIL RESOURCE depletion such as minerals and
petroleum. It can also be used for scorekeeping, e.g., aiding the monitoring of
resource rents captured (or not captured) from period to period.
•
The geGDP norm-based cost-effectiveness approach, which is embedded in a
multiple bottom line framework, can be applied effectively on the interfaces of the
economy with environmental assets whose change dynamics and their long-term
welfare consequences have high uncertainties. Examples are non-produced
BIOLOGICAL RESOURCES (such as fisheries, where catch limits can be proposed),
FRESHWATER pollution (where concentrations of contaminants can be measured and
various emissions norms and thresholds can be applied), AIR QUALITY (for which
emissions and concentration targets can be policy reference points, and CLIMATE
SYSTEM stability (including greenhouse gas emissions and CFCs implicated in
ozone-layer destruction, for which emissions and concentration targets can again
be policy reference points).
•
Some environmental asset classes are the object of both direct
productive/extractive uses and indirect degradation (the obvious examples are
WATER RESOURCES and non-produced BIOLOGICAL RESOURCES, and in a different way SOIL
RESOURCES). Some thought should be given to whether or not it is satisfactory to
include some components of asset change in an adjusted monetary measure,
while leaving other components outside the sphere of monetization. This question
may also be posed for AIR QUALITY and the associated questions around health
damages and human capital.
•
There are, finally, a few facets of environmental change that may pose difficulties
for both approaches to adjusted national income estimation. Biodiversity loss and
policy for biodiversity protection is one example (and, by extension, some aspects
of marine resources). Measures for protection of individual ecosystems or
population levels of target species can sometimes be put into cost-effectiveness
analyses, and thus incorporated within geGDP estimates for specific country
purposes. But there is little consensus about meaningful indicators of biodiversity
change and biodiversity value on a global scale or across a wide diversity of
ecosystems. This limits the policy robustness not only of damage-based monetary
valuation concepts, but also of maintenance cost (supply side) standards-based
analyses. 35
6.5 Many categories of air, water and soil pollution furnish examples of ‘disinvestments’ in environmental assets (natural capital) that can be the object of
valuation approaches on both sides of the Monetisation Frontier. This is a necessary
complementarily, not a conflict. In policy contexts, the confrontation of the two types
of information can be very useful. There is a sort of tâtonnement process, not in the
35 The famous book Silent Spring by Carson (1960) drew attention to the far-reaching and perhaps
incalculable effects of pesticide-induced biodiversity loss. More recently, O’Riordan and Stoll-Kleenman
(2002) highlight the inevitable social complexity of biodiversity valuation. In Europe, the TEEB
programme (The Economics of Ecosystems and Biodiversity) provides an ongoing documentation of the
state of the art concerning biodiversity change monitoring and valuation (see
http://ec.europa.eu/environment/nature/biodiversity/economics/pdf/teeb_report.pdf).
30
sense of finding a ‘market equilibrium’ between supply and demand, but rather in the
sense of the integration of scientific, economic and social dimensions of information in
political processes that resolve the ‘social demand’ for maintenance (or not) of
environmental functions. 36
Take again the example of AIR QUALITY. Pollutants into air degrade the Air asset, and this
results in a delivery of bad habitat conditions to human (and other) populations,
documented as discomfort, respiratory and other health problems. In this context,
•
Working on the one side of the Monetisation Frontier, economic analyses may seek
to estimate monetary value of losses to economic production due to health and
ecosystem damages from, for example, air pollutants such as acid rain precursors,
urban smog, PM10 particulates (etc.);
•
Working across the Monetisation Frontier, economic costs of meeting emissions
targets can be estimated, based on various scales of firm, sectoral and national
economy analyses.
Costs of meeting targets, estimated through model analyses of the economy, can then
be presented and considered, in a policy process, in relation to the identified
economic production and human welfare benefits of less pollution. In this way an
understanding is built up of justifications for lower pollution and of the implications for
the economy and for society of achieving lower pollution. The procedure can be
repeated for each major category of environmental risk or damage, thus establishing
an information base for negotiation of environmental and economic policy targets and
priorities.
6.6 In this regard, and although it is not the main purpose of this paper, it is useful to
highlight some contexts of the use of adjusted net national savings, asset change, and
income indicators.
•
A ‘country manager’ (i.e., the assortment of policy making agencies) must manage
a portfolio of economic, social and environmental assets. The decision to include a
natural resource or environmental function within an enlarged ‘asset’ portfolio with
monetary evaluation will reflect judgements about the country’s capacity to
exercise a management control over these assets and about the significance of the
asset as a source of revenue (such as resource rents and export receipts) or costs
(e.g. burden on public funds for water purification investments).
•
However, as well as managing national assets in a “commercial perspective”,
there is also the concern for longer term development potential, viz., the
sustainability agenda. For sustainability purposes, the monetary AICCAN/Genuine
Savings/ANS type of indicator must be set in the wider systems context of
(1) policy targets for the maintenance of critical environmental functions, and
(2) the possible significance for national sustainability prospects of environmental
load displacement to or away from the country. In this context, just as a company
undertakes forward studies and market research, so a country manager (i.e., the
various components of the policy community) will engage in forecasting and
strategic forward studies exercises. In the case of environmental and economic
sustainability, this requires the investigation of feasibility of meeting
simultaneously specified economic capital formation and environmental
performance goals. Sustainability prospects for the medium to long term can be
investigated via comparison of scenarios for ex ante geGDP based on contrasting
explicit propositions about consumption, technological change, and
environmental performance requirements for each of the Environmental Asset
classes having policy importance for the national economy.
36 This line of argument was advanced by the GREENSTAMP project (see Brouwer and O’Connor (eds.,
1997); Brouwer, O’Connor and Radermacher 1999), and leads to an insistence on complementing
quantitative data estimates with scenario modelling and deliberation frameworks (cf., Douguet,
O’Connor and van der Sluijs 2009; Faucheux and O’Connor 2002; Frame and Brown 2008; O’Connor and
Frame 2009).
31
Information of value is not found only in the aggregate “adjusted national income”
figures and time series themselves — which are always open to alteration through
changing assumptions and data sets. What matters most is the collective learning
about natural systems, technological potential, economic systems, and policy
processes that can take place through construction and comparison of the different
aggregates, model outputs and scenarios. 37
7.
Summing Up
We try to sum up the sequence of challenges for the development of national accounts
extended to economy-environment flows and environmental asset change, in Figure 14
below, which sets out the stages of accounts compilation, from the building up of
hybrid indicator catalogues (upper left) to the estimation of adjusted monetary
aggregates (lower right).
There is, in this simple exposition, no normative presumption that the accounting
efforts should lead from top left towards bottom right (with adjusted monetary
macroeconomic aggregate indicators being considered as the ‘Mecca’ of the SEEA
statistician’s pilgrimage). On the contrary, we support multiple angles of attack for
implementing this part of the SEEA, as an multi-scale information system that can be
mobilised in various ways in support of different sorts of multiple-criteria performance
assessments. Although there is an important emphasis in the SEEA Chapters 9 and 10
on the national macroeconomic scale of analysis, the underlying classification
structure [ECON sector] x [ENV asset class] x [ENV Service type] is common across
scales and facilitates use at different scales such as business reporting,
regional/territorial government, and so on.
37 We have focussed in this section on two ‘adjustment’ concepts, signalled by ‘ANS’ and ‘geGDP’. However
there are several further adjustment dimensions that can give rise to important contrasts and
comparisons. We have already mentioned in Section 3 the distinction between accounting based on
costs caused and costs borne which, politically and economically, is very important for use of national
accounts (Muradian and O’Connor 2001; Muradian, O’Connor and Martinez-Alier 2002). Another
important dimension is the search for periodic indicators of national well-being through ‘adjustment’
away from GDP and conventional measures of national income, for example various specifications for
ISEW (Index of Sustainable Economic Welfare) and GPI (Genuine Progress Indicator) estimation (e.g.,
Lawn 2003 and several papers in Lawn (ed.) 2006). It is argued in review work by O’Connor (2009) that
these four major adjustment concepts are complementary (and not theoretically in competition with
each other) and, the key insights come mostly from comparisons of differences obtained along each of
the adjustment directions.
32
Figure 14: Steps from Hybrid Indicators to Monetary macroeconomic adjusted
aggregates
Classification Structure:
[ECON sector] x [ENV asset class]
x [ENV Service type].
Hybrid Accounts
with Multiple Metrics
(including various physical and
monetary measurement units)
Accounts based on Monetary Valuation
For each ‘cell’, attempt to establish
an inventory of significant EconomyEnvironment flows using a small
number of measurement units
For each ‘cell’, explore the prospects
of attaching ‘shadow prices’ to
some or all of the types of EconomyEnvironment flows expressed in
non-monetary measurement units
Various procedures of (partial)
aggregation, where
commensurability permits, across
cells…
…by: [ECONOMIC sector] and/or by
[ENVIRONMENTAL Asset class]
and/or by [ENVIRONMENTAL Service
type].
Various procedures of (partial)
aggregation, where and to the
extent that monetary
commensurability is applied, across
cells…
…by: [ECONOMIC sector] and/or by
[ENVIRONMENTAL Asset class]
and/or by [ENVIRONMENTAL Service
type].
Integrated macro-economicenvironmental assessment with
multiple bottom lines, e.g.,
Ecological Footprints (in energy,
mass, GHG our other numéraires of
equivalence); or greened economy
GDP, where the economic
performance measure of net
national income, adjusted net
savings (ANS), or a nation’s GPI
(etc.) is complemented by
environmental state and interface
(environmental pressure, service)
performance indicators for each
Environmental Asset Class)
Estimation, after appropriate
specification of the ‘Monetisation’
boundary for asset classes and
flows, of adjusted monetary
aggregate indicators such as
‘Genuine savings’, ‘AICCAN’ and
other concepts of adjusted net
savings (ANS); and also the ISEW
0. Catalogue of Indicators relating to
the state of Environmental Assets
(stocks)
and
to
EconomyEnvironmental interactions (flows)
MICRO LEVEL
* Classification of state/stock
indicators by Environmental Asset
Class;
* Classification
of
EconomyEnvironment flow indicators by ‘cell’
in terms of [ECON sector] x [ENV
asset class] x [ENV Service type].
MESO LEVEL
(Deliberative indicator-based multicriteria approaches to sectoraleconomic performance
assessment…)
MACRO LEVEL
(Deliberative indicator-based multicriteria approaches to macroeconomic performance assessment
(e.g., dashboard approaches to
national sustainability performance,
covering social, governance and
cultural as well as environmental
and financial/economic facets)
33
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