Recording Capital Depreciation and Ecological Debts in the National Accounts: Possibilities Offered by the Development of Ecosystem Capital Accounts Jean-Louis Weber Special Adviser on Economic-Environmental Accounting European Environment Agency

Economists, Policy Makers and Accountants Policy Makers Accountants Economists Statisticians Look mostly at the past flows Look at future for estimating assets value (in absence of observable price) and capital consumption Policy Agenda Analysis & assessments Analysts & modelers Look backward and forward Decision makers Look backward for control and assessment Look forward for programmes & budgets Evidences Evidences, concepts Theories

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Adaptability to perturbations… … depends for part on health of human systems and ecosystems: Robustness Productivity Integrity, diversity Resilience Autonomy A country with high public debt is vulnerable to perturbations… A country with high private debts is vulnerable… A company with high debts is vulnerable… A factory with insufficient security systems is vulnerable… A factory or a household with insufficient insurance coverage is vulnerable… A river basin when deforested is vulnerable to floods… Broad pattern intensive agriculture makes soil vulnerable to erosion Mono-specific crops or forests are more vulnerable to pests …

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Adaptability means (for part…) maintaining & restoring capital Maintaining capital is maintaining its wealth, productivity, capability, health, options… Capital depreciation (business accounts) or consumption (national accounts) is an estimation of the money to set aside in order to maintain or replace capital. Recording depreciation is a major concern of accounting standards, the issue being fairness of measurement of income, of actual price of commodities, and of economic performance. Calculation of companys net income or profit must be net of capital depreciation (IFRS) To be reliable, the information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance In National Accounts, calculation of net domestic product, net national income and net savings is net of consumption of fixed capital (SNA2008).

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Natural resources are a capital: depreciation should be calculated IFRS and SNA recommend recording depletion of economic natural assets (such as oil, coal, ores, timber or fish stocks) which owned and managed for profit. IFRS adjusts net income calculation from natural resource depletion (depreciation). The SNA2008 doesn't adjust Net National Income from depletion (because the calculation is optional, measurement issues). Degradation of ecosystem functions is not recorded either by IFRS or SNA. Basic ecological functions are simply ignored although they supply services to people and to the economy itself. Depreciation or Consumption of Ecosystem Capital (CEC) is an unpaid cost. An unpaid cost is a debt. CEC is the measurement of the increase in ecological debts (to future generations) and should be recorded accordingly. Accounting for ecosystem capital degradation and depreciation aims at providing policy makers with measurements necessary to calculate the real national income, the true prices of the commodities that we use and when this price is not paid, to record the amount of debts to nature which are in reality debts to future generations.

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov National Accounts: Recurrent demands for improved economic indicators and aggregates Historical pioneer green accounting projects: Norway, Canada, France, Philippines, Indonesia, the Netherlands, Spain… Rio1992, Agenda 21 UN SEEA1993 to adjust the UN System of National Accounts. SEEA revised in 2003 New SEEA revision by2012/13, including now a special volume on ecosystem accounts and valuation Recent initiatives: –Beyond GDP Conference 2008 –Potsdam 2008 G8+5 initiative and TEEB –Stiglitz/ Sen/ Fitoussi report on the measurement of economic performance 2009 –New CBD Aishi-Nagoya Strategy 2010: demand for the inclusion of biodiversity and ecosystem value into national accounts –World Banks new Global Partnership for Green Accounting and Ecosystem Valuation –References to environmental accounts for measuring progress in Green Economy, Green Growth, Resource Efficiency… Initiative(s) in preparation for Rio+20 In Europe, new Regulation on Environmental Accounts: Eurostat (the economy-environment interface) and the EEA (ecosystem capital accounts)

UN manual for environmental-economic accounting: SEEA2003 Enlargement of the System of National Accounts (SNA) RM HASSAN - UN The System of Environmental and Economic Accounting (UN 2003) - RANESA Workshop June 12-16, 2005 Maputo Volume 1 The SNA satellite accounts for the environment expenditure, taxes, hybrid accounts, physical flows, sub-soil, energy, water, land, economic assets depletion Volume 2 Ecosystem capital accounts Ecosystem stocks and quality, ecosystem services, benefits and maintenance costs… Revision SEEA2012/13 Negative feedbacks of ecosystem degradation on production and wellbeing Impacts on ecosystem capacity of delivering services/benefits

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The fast track implementation of ecosystem capital accounts in Europe Based on: –European experience –Current development of ecosystem accounts in the UN SEEA revision Objectives: –Meet the policy demand –Accounts for 27 EU countries –Best use of geographical information when possible, e.g. 1 km x 1km grid –Use of official statistics for socio-economic data –Annual accounts –Physical accounts first, by 2012, followed by monetary accounts make it relevant but simple

Products & economic assets Fossil energy & materials Biomass/carbon Water Land systemic services Economy performance Economic growth Trade Value-added, income, profit… Consumption Investment Wealth (non-financial and financial assets) Economic health (net savings, assets and debt quality, accountability, prices, well-being, knowledge) Ecosystem potential (capacity to deliver services) Ecosystem productivity Flows Accumulation Stocks Ecosystem health (biodiversity, integrity, resilience, interdependence) Capital maintenance (to remediate degradation) Accounting for the performance(s) of 2 co-evolving systems: resources, productivity and health Economic system Ecosystem Use of natural resources

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The narrative behind Ecosystem Capital Accounts: 1- Ecosystems deliver altogether multiple services Source: Gilbert Long, 1972 A propos du diagnostic écologique appliqué au milieu de vie de l'homme. Options Méditerranéennes, 13, CHIEAM, Montpellier, Juin 1972

The narrative behind Ecosystem Capital Accounts: 2- Only a surplus is accessible for human use Ecoproduct (of cycling and reproductive systems/ capital) are produced by means of other ecoproducts. The ecosystem production function includes a surplus ecoproduct that can be used by the economy. (from Anthony Friend 2004) Economy Basic eco- product Non-basic eco- product Sources: Kling/U Michigan_2005 & Friend/ISEE_2004 Necessary for ecosystem reproduction (conservation of ecosystem health, integrity, functions & services) Surplus accessible for harvest/abstraction

The narrative behind Ecosystem Capital Accounts: 2- Only a surplus is accessible for human use Basic eco- product Non-basic eco- product Sources: Kling/U Michigan_2005 & Friend/ISEE_2004 Possible compensation = artificial input (irrigation, energy, fertilizers, infrastructures…) Challenge = maximise yields while maintaining natural functions and biodiversity Necessary for ecosystem reproduction (conservation of ecosystem health, integrity, functions & services) Surplus accessible for harvest/abstraction Non-sustainable harvest/abstraction Economy

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov About natural resource: availability vs. accessibility Available resource: the total resource (actual stocks and flows) which can be used in principle (but should to be shared between economy and nature…). Accessible resource: the surplus (actual stocks and flows) which can be used considering 1) physical constraints (timeliness and location, cyclical risks, bio- chemical quality) & 2) the amount to be left to nature for ecosystem reproduction. N.B.: When returned to the ecosystem (leftovers in agriculture or forestry, water returns…) the resource destroyed or modified during the production process becomes accessible again. Ecosystem capital accounts refer to accessible resource and intensity of use.

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Accessible resource: carbon/biomass, freshwater, systemic services Accessible resource = Stocks (soil, forests, aquifers, reservoirs, landscapes…) Minus inaccessible stocks Physical inaccessibility (deep aquifers …) Inappropriate quality (salted or polluted water, non arable land…) Plus flows (NPP, effective rainfall…) Minus inaccessible flows Physical inaccessibility (most of flood water, distance, non transportable resource, timeliness issues, water evaporated by irrigation…) Inappropriate quality (polluted water) Maintenance of stocks (soil carbon, forests stock of timber, aquifer level, dilution of pollutants in rivers…) Plus/minus adjustment for stress, risk

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Example of accessible water adjustment: occurrence of soil water stress Number of days when no water was available for plants in 2001, 1 km^2 grid Source: Blaz Kurnik, EEA, 2011

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The narrative behind Ecosystem Capital Accounts: 3 – As a capital, ecosystems produce altogether 3 broad types of services between which there is no compensation or tradeoff: biomass/carbon AND freshwater AND systemic services. Ecosystem capital potential (& degradation) can be measured by combining measurements of these 3 broad services (accessible resources). 1 - Accessible carbon surplus 2 - Accessible water surplus 3 - Accessible ecosystem systemic services Total Ecosystem Capital Potential & Ecosystem Capital Degradation Measurement with a new physical currency: EPUE for Ecosystem Potential Unit-Equivalent

GDP, National Income, Final Consumption at Purchasers price Healthy ecosystem deliver services to the economy & to the public well-being Ecosystem assets/capital ( ) The narrative behind Ecosystem Capital Accounts: 4 – The simplified ecosystem capital accounting circuit Adjusted macro economic aggregates Adjusted capital consumption Final demand at full price Adjusted net domestic product (or net national income) ES based economic benefits () ES based economic benefits () Ecosystem degraded by over-use ( ) (Unpaid) costs needed to remediate ecosystem degradation ( ) Economic system (including natural assets & ecosystem services ( and ) Jean-Louis WeberEEA Scientific Committee Workshop 5 October 2011

Estimation of ecosystem capital depreciation… Physical accounts of E-services t1 t2 ( ) t2 t1 Degradation of ecosystem capital …based on remediation costs …based on assets values & addition t2 t1 Valuation of E-services Valuation of E-services Assessment of remediation costs by issues Assets Flows ( ) Estimation of ecosystem capital depreciation: 2 possible ways NPV & addition NPV & addition Assets Calculation of unit costs Account of pressures responsible of degradation Jean-Louis WeberEEA Scientific Committee Workshop 5 October 2011

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov From theory to statistics and accounts Theoretical background (very incomplete…): –Georgescu-Roegen (The Entropy Law and the Economic Process (1971), –Odum (emergy) –Resource depletion: Hotelling, El Serafy –System approach : Joel de Rosnay (The macroscope, 1975) –Dissipative structures: Prigogine (The New Alliance, 1986) –L'économique et le vivant: René Passet (1977) –Natural resource economy: Naredo (1987) –Urban metabolism: Duvignaud –Global biotic regulation: Gorshkov –Co-evolving systems: Norgaard –Ecosystem services: Long (1972), Costanza and De Groot, Millennium Ecosystem Assessment (2003) –Interaction between scales: Hollin (panarchy) –Landscape ecology (UK) –Ecosystem units: socio-ecological systems (Gallopin, Carpenter, Rockström, MA2003…) –Ecosystem health (D. J. Rapport), resilience (the Resilience Alliance) from economic-ecological theory to statistical practice and accounts : statistical units and classifications

Main relations between classifications & statistical units in the revised SEEA (from UNCEEA 2009 – EEA & FAO)

SNA & SEEA: assets shared by the economic and the ecosystem Adapted from Ivo Havinga and Daniel Clarke, 2011

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Common International Classification of Ecosystem Services (draft EEA, UNEP & UNSD) CICES: Table E.2: Proposed Thematic, Class and Group Structure – source: EEA & Roy Haines-Young, Presented at UNCEEA 2010

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov sampling, questionnaires Land cover classification based on FAO LCCS3 Land Cover Types (SEEA vol. 1) zoning and derived Land Cover Functional Units (SEEA vol.2) Source: FAO (DiGregorio and Ramaschielo) & EEA (Steenmans & Weber) 2011 provisional

Ecosystem accounting and statistical units (continued) SNAs statistical units dont record ecosystem degradation need for other units… Theoretical units vs. observation units (proxies for collecting data) Theoretical units: characteristic systems into which natural and socioeconomic elements interact to transform ecosystem functions into goods and services: –Functional units producing elementary services –Socio-ecological systems, socio ecosystems or Socio-ecological production landscapes (the Japanese satoyama and satoumi) Observation units: –For which we can collect data in a systematic way –Mostly surface units: geo-systems, land cover units, functional administrative units, ownership units… Japan Satoyama Satoumi Assessment, Satoyama-Satoumi Ecosystems and Human Well-being: Socio-ecological Production Landscapes of Japan – Summary for Decision Makers. United Nations University, Tokyo, Japan.

Land cover functional units & Socio-ecological landscape units (SELU)

ZOOM: SELU in Central Europe

ZOOM: Land cover functional units by SELU

t0 Total ecosystem capital potential & change t1 Improvement Degradation

Ecosystem physical degradation, sustainable benefits from ecosystem services and non-paid maintenance costs Consumption of ecosystem capital (non- paid costs) Sustainable benefits (income from key ecosystem services) Sustainable use coefficients Economic statistics & national accounts Mean restoration prices Improvement Degradation Sustainable benefits (Value Added from key ecosystem services)

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Ecosystem-Economy integrated accounts SEEA Volume 2 SEEA Volume 1

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The draft framework Basic accounts Synthesis tables in physical units Monetary accounts

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The basic accounts by ecosystem unitsby economic sectors

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The synthesis tables by ecosystem unitsby economic sectors

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov The monetary accounts by ecosystem unitsby economic sectors

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Key Indicators and Aggregates Net Ecosystem Accessible Carbon Surplus (Use/NEACS reflects intensity of use; it integrates resource efficiency and ecosystem) Net Ecosystem Accessible Fresh Water Surplus Green Accessible Landscape Infrastructure (and demand of services in the Neighbourhood of human settlement (GINES)) Net Total Ecosystem Capital Potential and Ecosystem Capital Degradation (integrates acessible carbon, water and landscape and mean biodiversity rating basis to calculate Consumption of Ecosystem Capital in ) Final Consumption at Full Price (the full cost of commodities in integrates purchasers prices and non-paid domestic consumption of ecosystem capital (CEC), and relates to unfair trade and ecological debts) Imports at Full Price (total of imports at CIF price and Ecosystem capital depreciation virtually embedded into imports) CEC Adjusted Net Domestic Product (or/and Net National Income, or/and Net Savings) (a more complete adjustment of Net Product, Net Income or Net Savings includes in addition subsoil resource depletion).

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov About ecological debts… CEC is a new debt to national future generations CEC can be embedded into imports and exports there are external debts Other ecological debts dont result from CEC but from collectively stated targets; they correspond to recovery of historical or degradation demand for improvements; they are stated in legal documents (national law or programme, international conventions with quantified objectives…) which are voted by parliaments. Physical Debts and Monetary Debts are recorded separately; the repayment of the monetary debt doesnt not necessarily extinguishes the physical debt is CEC has been underestimated; oppositely, unexpected natural processes or changes in land use may lead to a cheaper recovery cost. Financial ecosystem assets, physical and monetary units exist as well. They are the are the counterpart of: –The non-financial natural assets in the SNA sense (owned and managed for profit); they should never be consolidated with debts or rights related to non-market values –Rights for compensation in case of exported CEC; such right could be claimed in counterpart of actual restoration only; –Rights related to verified improvements (by an international organisation) –International allocation of rights regarding global ecosystem issues and national potentilas Bertrand de Jouvenel 1968: Because National Accounts are based on financial transactions, they account nothing for Nature, to which we dont owe anything in terms of payments but to which we owe everything in terms of livelihood.

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov About ecological debts… other consolidation rules for ecological debts: –Physical debts are not directly transferable; e.g. acquisition of debts from foreign country (embedded in imports) cannot be extinguished by ecosystem improvement in the buyer country; –When created by physical debts, monetary debts are not mechanically extinguished by repayment but by the extinction (remediation) of the physical debt itself; –Because physical ecosystem capital assets are not valued, monetary debts cannot be consolidated with monetary ecosystem non-financial assets; –Monetary debts can be consolidated with financial ecosystem capital assets in the context of international mitigation systems if they include initial allocations of (non transferable) ecosystem capital rights and/or recording systems for ecosystem improvement and consolidation rules. –The physical counterparts (units: Ecosystem Potential Unit-Equivalents) of approved allocations and improvement s are not transferable. However they can be leased to ecological debtors (countries, business…)

Jean-Louis WeberIntenational Forum on Ecosystem Adaptability Science, Tohoku University, Sendai, Nov Thank you! Jean-Louis Weber