2 A Capital Approach to Measuring Sustainable Development Robert Smith Statistics Canada OECD Meeting on Accounting Frameworks for Sustainable Development Paris, May 2003

3 Development defined Development is assumed to be the on-going increase in human welfare –An anthropocentric interpretation Welfare is assumed to be a function of consumption of goods and services –Consumption of unpriced goods and services explicitly included Welfare is assumed to have no upper bound –BUT, there are assumed to be negative returns to increased consumption of some goods and services if this leads to decreased availability of others

4 Sustainable development defined Sustainability exists when human activities do not undermine key systems’ capacities to generate goods and services Three such systems –Economy, environment and society –Each provides essential flows and is subject to perturbation –Each must be maintained, but not necessarily intact

5 Capital as a conceptual framework Each of the three principal systems has the characteristics of capital –Each provides essential services –Each is subject to deterioration over time through human use –Each can be maintained with appropriate investments Three broad categories are now recognized –Economic, natural and social capital

6 Substitutability Substitution assumed among goods and services, but to a limited extent Some natural capital is highly substitutable –Most natural resources –Monetary valuation required Other natural capital is “critical” –Atmospheric systems –Physical measurement most appropriate

7 Substitutability: Some questions Substitution at the margin versus substitution in whole –Do ecosystems subscribe to marginal behaviour? Ignorance and substitution –Is it substitution when one makes a decision in ignorance of its external effects? Substitution of private goods versus public goods –Can one speak of the private choice to substitute a public good?

8 Strengths of the Capital Approach Clear guidance on what to measure –Stocks of assets –Use of the services of these assets –Investment Also on what not to measure –No need to measure production –No need to measure the sub-elements of assets (that is, measure the forest, not the trees)

9 More strengths Closely aligned with intertemporal notion of sustainable development -Capital is the economic approach to intergenerational equity -Intuitively familiar to most people -We all understand the need to look after our private capital -Learning that nations must do the same should come easily

10 A quick overview of natural capital Three categories –Natural resources, land and ecosystems Contributes to welfare in a variety of ways –Use benefits: humans make current use of environmental assets either directly (fossil fuels) or indirectly (ecosystems) –Non-use: the benefits derived from continued existence of assets for future use

11 Factors affecting natural capital Resource exploitation –Harvesting, extraction Land-use change –Conversion of forest to farmland to urban land Waste material flows –Disruption of ecosystem functioning Environmental protection activities Along with assets, these are the broad components of a natural capital accounting system –SEEA 2003 meets the needs

12 Future work needed Valuation techniques –These are inadequate in many instances Ethical foundation of the approach –Many would object to the strongly anthropocentric viewpoint –But is it necessarily at odds with a more bio-centric viewpoint? The questions around substitution