Jean-Louis Weber Senior adviser on economic and environmental accounting, ad h.,

1. Solutions for Sustaining Natural Capital and Ecosystem ServicesInternational Conference and Workshop – Salzau Castle and Kiel University June 7th 2010 – June 11th 2010 Beyond GDP: Ecosystem services as components of progress, wealth and well-being Jean-Louis Weber Senior adviser on economic and environmental accounting, ad h., European Environment Agency “The same rule of self-destructive financial calculation governs every walk of life. We destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.”John Maynard Keynes 1933 “ Because National Accounts are based on financial transactions, they account for nothing Nature, to which we don’t owe anything in terms of payments but to which we owe everything in terms of livelihood.” Bertrand de Jouvenel 1968

2. Accounting for nature: recurrent policy demands Environmental performance of the economy Decoupling from resource use and generation of residuals / Material flows accounts Decoupling from impacts / Life cycle analysis Cost and benefits of meeting policy targets Water Framework Directive  “good ecological quality of catchnments”, “full recovery of costs” EU Climate change programme  carbon emission offset costs Environmental Liability Directive  remediation costs of impacts Natura2000 (as application of ELD 2004): restoration or replacement of degraded sites  costs And environmental sector policies: agriculture, regions, energy… Adjust or supplement GDP GDP and Beyond  “dashboard” of pressure indicators + “basket” of impact indicators “Stiglitz/Sen/Fitoussi” report  focus on Income (underinvestment) and Consumption (overconsumption) TEEB (G8+5 initiative, UNEP, CBD)  benefits from ES (+ ecosystem capital accounting) + insisting demand for information fit to be used in the actual decision process (incl. during the budgetary debates) Fit for policy trade-offs  both physical and monetary indicators Annual updates, like GDP  nowcasting  Ecosystem capital accounting – fast track implementation by EEA & Eurostat

3. GDP and the need to account for resource use and the ecosystem capital Solutions: technology & change in consumption patterns 22 Mio km2 17 Mio km2 Available cropland Solutions: conservative land use & soil ecological management Without soil conservation (land use) and soil ecological management, technological/economic solutions are not likely to be effective... And reciprocally...

4. Accounting, transparency and prudence • All accounting guidelines and norms have been established against opaque handling of money and possible manipulation of accounting reports and statistics. • Business accounting standards require “completeness” and “maintenance of capital” for “determination of profit”. • Requirements for national accounts are quite similar. They include “consumption without reducing ... real net worth”.

5. Concepts of Capital Maintenance and the Determination of Profit “104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance: • (a) Financial capital maintenance. (...) • (b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.”

6. RM HASSAN - UN The System of Environmental and Economic Accounting (UN 2003) - RANESA Workshop June 12-16, 2005 Maputo SEEA2003: enlargement of SNA1993 (now 2008)for a better description of the economy-environment relation Revision  SEEA2012/13 Impacts on ecosystems & related services/benefits Volume 1 Statistical Standard expenditure, taxes, hybrid accounts, physical flows, sub-soil, energy, water land, economic assets depletion Volume 2 Non Standard Accounts ecosystems, quality, valuation… Macro-ecological closure (non-linear feedback, spatial issues)

7. Where are we, regarding ecosystems? • Depreciation of natural assets in financial corporate accounts • Subsoil Assets plus Timber and Fish stocksare depreciated for computing profit and (net) fiscal benefit. Consumption of fixed capital in the UN SNA 2008 “6.240 Consumption of fixed capital is the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage. 6.241 Consumption of fixed capital does not, therefore, cover the depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas…” Ecosystem capital depreciation/ consumption Neither business accounts nor national accounts are recording it. Consumption of ecosystem capital is however an important variable when looking at sustainability issues for both business and governments.

8. What is ecosystem capital? • All ecosystems: forests, wetlands, heathland, grassland, sand and dunes, rivers and lakes, lagoons, estuaries, the sea, the atmosphere, the soil, agro-systems, and urban systems… • Ecosystems services are made of • resources which can be privately used (being privately or collectively owned): land, crops, timber, fish, water… and • functions like ecosystem renewal capacity and life support which are public goods • Ecosystem state depends on resource extraction/harvesting which should not go beyond threshold values. Resource depletion and ecosystem degradation are entangled.

9. Assets, services and values: 3 dimensions 2 - Non produced assets/ other services: mostly common goods, could be traded 1 – SNA produced & non produced assets: mostly for commodities (private goods & govt services) Provisioning Regulating Recreating 3 – Ecosystem healthy state: public good, non-rival, non-exclusive use, non-transferable ownership rights (green taxes as general source for maintenance, but offset certificates could be traded or leased)

10. Physical flows Accounting for ecosystem services & capital maintenance Additional payments stated policy targets needed to restore ecosystem capacity up to [corporate & public accounting norms, environmental laws & regulations, international conventions] Sustainability of ES use, [ecosystem degradation, resource depletion] Total ecosystem maintenance & restoration costs Payments to maintain ES benefits [actual protection expenditure embedded into prices, insurance premiums, annuities & interest of loans, green taxes, green subsidies] Sustainable macro economic benefits, sector functional income Ecosystem biophysical structures & processes [landscapes, biodiversity, Net Primary Production...] Ecosystem functions [nutrient cycling, water regulation, habitats, biomass...] Ecosystem services [provision, regulation, socio-cultural services] Benefits from ES [private & collective well being] Non valued private & collective benefits [mostly public good] Monetary flows Primary benefits, externalities & rents [mostly private] Payments to get usage of commodities & assets embedding ES [purchaser price, lease, fee & royalties] Weber, J.-L., 2010, adapted from Haines-Young, R. & Potschin, M.

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

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

13. Accounting for the performance(s) of 2 co-evolving systems: resources, productivity and health Economic system Economy performance Economic growth Trade Value-added, income, profit… Consumption Investment Wealth (non-financial and financial assets) Economic health (net savings, assets and debt quality, accountability, prices, well-being, knowledge) Use of natural resources Products & assets Fossil energy & materials Bio-carbon Water Land functional services (SUM) Nature Ecosystem potential (capacity to deliver services) Ecosystem productivity Flows Accumulation Stocks Ecosystem health (biodiversity, integrity, resilience, interdependence) (SUM) Capital maintenance (allowance “set aside” from the previous accounting period)

14. Valuation: macro and micro economics

15. Ecosystem Accounting: Green National Accounts and Costs-Benefits Analysis National Accounts = the macro-economic picture adjusted for natural capital depreciation Benefits & Costs Assessments = inclusive accounts for projects, sectors… Ecosystem capital 1 2 3 4 5 n Stocks & flows Health 2 Land cover Biomass/Carbon Soil Biodiversity Water catchments Sea Atmosphere Vigour Organisation Resilience Autonomy Healthy populations Ecosystem services valuation Bottom-up, individual preferences, market and shadow prices, Costs-Benefits Analysis, General Equilibrium model Service n value ?? Service n Operationcosts E.S n Service 5 value ? Service 5: e.g. existence Operationcosts E.S 5 Service 4 value Service 4: e.g. water regulation Operationcosts E.S 4 Service 3 value Service 3: e.g. eco-tourism Operation costs E.S 3 Service 2 value Service 2: e.g. fish provision Operation costs E.S 2 Service 2: e.g. fish provision Service 1 value Service 1: e.g. timber provision Operation costs E.S 1 Ecosystem / public good protection (all services) Ecological Taxes, Subsidies, Tradable Offset Certificates / Depreciation... Ecosystem restoration costs Top-Down, collective preferences, multi-criteria decision (economic & social values, long term targets…), Consumption of Ecosystem Capital

16. Natural assets valuation and depreciation • Non renewable assets and wealth maintenance, depletion • Depletion as difference between assets value at 2 dates • Problem when assets market prices statistics are uncertain  use of the Net Present Value of future benefits as a surrogate (SEEA2003, SNA2008) • Problems when using NPV: price volatility on speculative markets; depletion valuation uncertain and not considered as a capital consumption in flows accounts (SNA2008) • A more robust solution: the El Serafy “User Cost” methodology. Income from assets should be maintained by reinvesting one part of the operation rent. Only physical depletion of stock needs to be measured. • Renewable assets (ecosystems...) • Statistics on prices limited to the economic capital (owned and managed) • NPV doesn’t work (see next slides) • El Serafy rule needs to be adapted: when assets are renewable, the objective is no more to maintain income flows but instead to maintain their capacity of delivering services

17. “NPV” doesn’t give appropriate valuation of ecosystem degradation • Conventional economic theory: asset depreciation = difference between asset values at two dates • Two options for assets valuation (see SNA2008): • Use assets market prices when they exist • Use the “fair valuation” rule of financial assets when no observed or reliable price exists • NB: 1. and 2. are assumed to be equivalent under the condition of “perfect market” Financial value of natural assets = “Net Present Value” of expected future benefits =NPV If surveys or econometric models tell how much homo economicus is willing to pay for ecosystem services, there is no need to monitor Nature!

18. Final Consumption at the full cost Remediation cost Ecosystem capital accounting: asset = “quantity*quality”, only change is priced (imputed remediation costs) Degradation Restoration + = Purchaser price

19. Two approaches of benefits: bottom-up and top-down • Bottom-up: valuation of ecosystem services • Micro-economic valuation: case studies, CBA of projects or of sector policies • Disentangling of ES values (rents) from market values of commodities (e.g. Provisioning services) or assets (e.g. Regulating services) and addition of contingent “non use” values. • Require strong assumptions such as discount rates and opportunity costs • Limited consistency with national accounts prices, therefore weak comparability • Theoretical and statistical issues in aggregation (e.g. “benefit transfers” issue in a general equilibrium context) • Relevance: ecosystem assessments, support to scenarios (e.g. The TEEB/ COPI (Cost of Policy Inaction) study) • Top-down: sustainable macro-economic benefits based on ES • Acknowledgement of the difficulties above mentioned • Functional definition of benefits as Income made possible by sustainable ecosystem services • Limitations: function are non additive. • Advantages: • Statistical feasibility using input out put analysis, • Considers the full chain of beneficiaries of embedded rents, not only the primary producers or/and the final consumers

20. CICES: a general classification for accounting for ecosystem services CICES: Common International Classification of Ecosystem Goods and Services (CICES) for Integrated Environmental and Economic Accounting Cross referenced with international classifications (CPC, COICOP...) Discussed in 2 international workshops at the EEA, Dec.2009 and Dec 2010. and a discussion forum at http://cices.eu/ (V1) submitted in March 2010 to the UN Committee on economic environmental accounting in view of the SEEA revision Aim at being a standard and the common platform for ecosystem services accounts and assessments

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

22. Implementing accounts for ecologically sustainable macro-economic benefits Benefits are extracted from economic statistics on the basis of surveys and/or Input-Output Analysis (see next slide). No further modeling with elasticity coefficients, substitution assumptions… Ecological sustainability coefficients are directly derived from physical ecosystem accounts (degradation) The policy message is simple:“no fish, no fishermen, no transporters of fish, no transformers/processers, no retailers and no final consumption” Income distribution along the complete production/distribution chain being described, the blame for degradation (overfishing, overharvesting, intensive practices…) doesn’t fall anymore on the primary producer alone (fisherman, farmer or forester) or on the final consumer; the responsibility of every links of the chain is measured, including export-imports. The cost of nature protection is not referred to a mere conservationism ideal but to the sustainability of agriculture, forestry and fisheries. In Europe ecosystem accounting, the first three “functional services” (agriculture, forestry and fisheries) currently tested by EEA and Eurostat may be followed by tourism and water regulation (following progress at JRC)

23. Benefits : How to proceed in order to determine the „real significance“ for the whole economy of ES based economic activity? The „hypothetical extraction“ approach Step 1: Calculation of input coefficents (both transaction T and primary input P coefficients) Wuppertal Institut: José Acosta Fernández

24. The „hypothetical extraction“ approach Step 2: Assumption that an economic activity does not longer exist or ceases its production (elimination of column 2 and row 2, respectively) Wuppertal Institut: José Acosta Fernández

25. The „hypothetical extraction“ approach Step y: Application of this procedure on each sector of original production system Step z: Calculation of Gross Value Added effect by sector Step x: Calculation of reduction of total production due to ceasing of the production by sector 2 a) ∆x = Txt – woS2xt b) TE = Total effect =∆x – x2 Wuppertal Institut: José Acosta Fernández

26. Interpretation of „Total GVA-Effect Matrix“ resulting of the linkage of the„Total Effects/Flows Matrix“ of hypothetical extraction with the national Gross Value Added Forward GVA/GDP effects by sector: Total quantity of Gross Value, which cannot be added by itself and by the users of the products of sector i, if sector i reduces or ceases its production Backward GVA/GDP effects by sector: Total quantity of Gross Value, which cannot be added by itself and by the product suppliers of sector j, if sector j reduces or ceases its production Wuppertal Institut: José Acosta Fernández

27. Implementing accounts for ecosystem restoration costs

28. Georges Braque – Harbour in Normandy, 1909 Dependency Index (land, soil, energy, water, N,P,K...) Dependency Index (land, soil, energy, water, N,P,K...) Total Ecological Potential (terrestrial ecosystems) Total Ecological Potential (terrestrial ecosystems) Biodiversity Index (rarefaction, loss of adaptability) Carbon/ biomass (carbon, biomass, diversion from Nature) Landscape Index (the Landscape Ecological Potential) Health Index (human, wildlife and plants populations) Health Index (human, wildlife and plants populations) Biodiversity Index (rarefaction, loss of adaptability) Bio-productivity Index (carbon, biomass, diversion from Nature) Landscape Index (the Landscape Ecological Potential) Water Index (exergy loss from evaporation & pollution) Water Index (exergy loss from evaporation & pollution) Simplified Ecosystem Accounts for Degradation & Depreciation : a “Cubist” Approach Multi-criteria diagnosis Change in TEP * € =Consumption of Ecosystem Capital No valuation of ecosystem assets is needed

29. Implementation priorities Landscape Index (the Landscape Ecological Potential) Water Index (exergy loss from evaporation & pollution) Carbon/ biomass Index (carbon, biomass, diversion from Nature) Biodiversity Index (rarefaction, loss of adaptability) Health Index (human, wildlife and plants populations) Inter-dependency Index (land, soil, energy, water, N,P,K...) Indexes Spatial Units Fast track implementation of simplified ecosystem capital accounts in Europe / costs Maintenance/ Restoration Costs Land protection & management Water protection & management Carbon/ biomass Protection & management Biodiversity protection Health protection/ environment Agriculture & fishery subsidies Expenditure accounts Sectors Land Use (surfaces & commodities) Water resource, supply & use Carbon/ biomass resource, supply & use Fishing, hunting, harvesting of wild species (non cultivated) LCA: impacts of chemical,, on human and wildlife health Virtual land, water, and carbon use (domestic and in imports) mean € Sectors Land functions & ecosystem services Biodiversity related ecosystem services Carbon/ biomass functions & ecosystem services Human morbidity/ environment & food security Dependency from regulating ecosystem services Water functions & ecosystem services Basic physical balances Services Ecosystem capital depreciation Land cover stocks & change Carbon/ biomass resource and extraction/ harvesting Natural and semi-natural habitats & species distribution Water, C, energy, NPK, subsidies Water bodies resource & abstraction Distribution of critical areas for health Spatial Units F degradation Landscape patterns Water quantity & quality Carbon/ Biomass, productivity Biodiversity factors Ecosystem health factors Net external balances by socio-ecosystems Health counts Spatial Units Change in Total Ecosystem Potential

30. Land Ecosystem Account: Landscape Ecological Potential Green Landscape Index (derived from CLC) Corine land cover map (CLC is derived from satellite images) Nature Value (Naturilis, derived from Natura2000 designated areas) Fragmentation (Effective Mesh Size (MEFF) derived from TeleAtlas Roads and CLC)  and Landscape Ecological Potential (LEP) 2000, by 1km² grid cell LEP 2000 by NUTS 2/3

31. Landscape ecosystem potential and change Degradation Improvement

32. Accounting for ecosystem capital embedded into trade Global trade: the picture in US$ Because ecosystem capital depreciation is not recorded, the commodities based on ecosystem services are underpriced, which is reflected in smaller South-North flows.

33. International Trade Statistics: Virtual land use & agriculture footprints Trends in EU virtual land flows: EU agricultural land use through international trade between 1995-2005. Manel van der Sleen, EEA 2009 Accounting for embedded water, carbon... is part of ecosystem capital accounting

34. Back to GDP...

35. Conditions for effective and efficient adjustment of national accounts • Important characteristics of National Accounts • National accounts are mostly based on statistics – only a few indirect measurements (e.g. government production) and a very few estimations (constant prices, fixed capital depreciation and assets valuation when the NPV rule is chosen). • National accounts observe the past: prices and consumption level/structure are given (NB: valuations based on willingness to pay are forward looking and include consumer surplus – therefore they are not consistent with observed market prices); in NA, the link to future is presented via subtraction of Consumption of Fixed Capital from National Income and Net Savings. • National accounts are … national, and annual (even quarterly) macro-economic syntheses • Adjustments of costs and benefits must meet NA standards to be effective and efficient • robust which means based on verifiable statistics and monitoring data • backed upon physical accounts and indicators; • regularly updated for meeting the policy agenda, at least once per year • and clearly interconnected with the regular macro-economic tools

36. CEC: Adjustment of National Income and Final Consumption Gross Domestic Product (GDP) – or + Transfers with the Rest of World = Gross National Income (GNI) _ Consumption of Fixed Capital = National Income (NI or NNP) -- Depletion of subsoil assets -- Consumption of (domestic) ecosystem capital = Final Consumption at Purchaser’s Price Consumption of ecosystem capital embedded in Imports (minus in Exports) Final Consumption at Full Cost of Commodities = + + Adjusted Real Net National Income

37. [future] Integration with National Accounts aggregates Economy: performance, double-decoupling, capital maintenance, ecological debts Consumption of Material/Energy GDP Environment:mitigation of nature degradation, compensation, restoration Consumption of Ecosystem Capital GDP Ecosystem Adjusted Net Savings Net Savings Remediation costs of ecosystem capital degradation Domestic + Foreign Ecological LiabilitiesDomestic +Foreign Ecological Fin’l Assets Adjusted Disposable National Income National Income Final Consumption [purchaser price] Final Consumption [full cost] Sustainable macro-economic benefits based ecosystem services ES based Sustainable Income Sectors and Social groups ES based Sustainable Consumption ES based Commodities Consumption Social: sustainable consumption, new skills & jobs, benefits by social groups

38. [future] Integration with National Accounts aggregates “double decoupling” “adjusted net savings” & “ecological debts” “over-consumption & under-investment” “sustainable benefits from ecosystem services” • Sustainable Development = Thriving ecosystems producing altogether: • economic resources • carbon • biodiversity • clean air, clean water • options for the future (“development as freedom” – A. Sen)

39. Thank you for your attention!Jean-Louis Weberjlweber45@gmail.com