DRAFT FOR OECD EXPERT WORKSHOP 1 How the SEEA Experimental Ecosystem Accounting framework could be used for growth accounting and productivity analysis Paper prepared for the OECD Expert Workshop on Measuring Environmentally Adjusted TFP and its Determinants, 14-15 December, 2015 Carl Obst Director, Institute for the Development of Environmental-Economic Accounting (IDEEA) Honorary Fellow, Melbourne Sustainable Society Institute, University of Melbourne December 2015 1. Introduction In light of the ongoing realities of climate change and the increasing demand for food around the world, understanding the capacity of the environment to support agricultural production is of upmost concern. An important part of this understanding is the organization and analysis of information about the link between the environmental assets and ecosystems that underpin agricultural production and the production functions that describe the activities of the economic units (including households) that are involved in that activity. Commonly, environmental and economic analysis is not conducted in an integrated manner and the available information does not generally support such analysis. In this context, the measurement of productivity represents an important analytical and monitoring tool. The explicit incorporation of environmental considerations into productivity measures, especially for the agricultural industry, would support a more complete understanding of the factors that drive output and inputs growth and hence support the development of more integrated policy responses. At national level, the standard approach to measuring multi- or total factor productivity (MFP/TFP) that is used across OECD countries is known as growth accounting. The approach uses the framework and data from the national accounts – i.e., the dataset that incorporates gross domestic product (GDP) and associated measures of investment, wages and salaries, profits and related variables. The national accounts themselves are compiled by all OECD countries following the international standard, the System of National Accounts (SNA) (EC et al, 2009). Estimates for the agriculture industry are included in national measures of MFP. However, notwithstanding the direct use of environmental assets by the agriculture industry, the measurement of capital’s contribution to MFP growth in agriculture has commonly been undertaken using the same methods as for other industries – i.e. including only produced (or manufactured) capital. More recently, in some countries (e.g. Australia), a variation has been adopted with the inclusion of the area of agricultural land as a capital input (ABS, 2014), but no account is taken for the changing quality of land, for example through declines in soil fertility and soil erosion. Over the past 20 years there have been important advances in the measurement of natural capital and environmental assets, encapsulated in the recent international standard, the System of Environmental-Economic Accounting (SEEA) 2012 Central Framework (SEEA Central
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DRAFT FOR OECD EXPERT WORKSHOP
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How the SEEA Experimental Ecosystem Accounting framework
could be used for growth accounting and productivity analysis
Paper prepared for the OECD Expert Workshop on Measuring Environmentally Adjusted
TFP and its Determinants, 14-15 December, 2015
Carl Obst
Director, Institute for the Development of Environmental-Economic Accounting (IDEEA)
Honorary Fellow, Melbourne Sustainable Society Institute, University of Melbourne
December 2015
1. Introduction
In light of the ongoing realities of climate change and the increasing demand for food around
the world, understanding the capacity of the environment to support agricultural production is
of upmost concern. An important part of this understanding is the organization and analysis of
information about the link between the environmental assets and ecosystems that underpin
agricultural production and the production functions that describe the activities of the
economic units (including households) that are involved in that activity. Commonly,
environmental and economic analysis is not conducted in an integrated manner and the
available information does not generally support such analysis.
In this context, the measurement of productivity represents an important analytical and
monitoring tool. The explicit incorporation of environmental considerations into productivity
measures, especially for the agricultural industry, would support a more complete
understanding of the factors that drive output and inputs growth and hence support the
development of more integrated policy responses.
At national level, the standard approach to measuring multi- or total factor productivity
(MFP/TFP) that is used across OECD countries is known as growth accounting. The approach
uses the framework and data from the national accounts – i.e., the dataset that incorporates
gross domestic product (GDP) and associated measures of investment, wages and salaries,
profits and related variables. The national accounts themselves are compiled by all OECD
countries following the international standard, the System of National Accounts (SNA) (EC et
al, 2009).
Estimates for the agriculture industry are included in national measures of MFP. However,
notwithstanding the direct use of environmental assets by the agriculture industry, the
measurement of capital’s contribution to MFP growth in agriculture has commonly been
undertaken using the same methods as for other industries – i.e. including only produced (or
manufactured) capital. More recently, in some countries (e.g. Australia), a variation has been
adopted with the inclusion of the area of agricultural land as a capital input (ABS, 2014), but
no account is taken for the changing quality of land, for example through declines in soil
fertility and soil erosion.
Over the past 20 years there have been important advances in the measurement of natural
capital and environmental assets, encapsulated in the recent international standard, the System
of Environmental-Economic Accounting (SEEA) 2012 Central Framework (SEEA Central
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Framework) (UN et al., 2014a) which uses national accounting principles for the organization
and integration of environmental data.
In 2013, as an extension to the SEEA Central Framework, an additional perspective was
introduced to apply national accounting principles to the integration of information on
ecosystem condition and ecosystem services. This advance is referred to as ecosystem
accounting and is described in the SEEA 2012 Experimental Ecosystem Accounting (SEEA
EEA) (UN et al., 2014b).
In concept, ecosystem accounting provides information that can directly enhance the
measurement of MFP. In effect, measures of the ecosystem assets (i.e. the underlying natural
capital) that underpin agricultural activity can be included as a new factor of production in
deriving the volume of inputs – i.e. in addition to labour and produced capital. For
agriculture, the enhancement allows recognition of the changing quality of agricultural land
and surrounding ecosystems.
This paper articulates the way in which information on ecosystem services and ecosystem
assets might be incorporated into standard growth accounting measures of MFP. It also
provides a series of conceptual and measurement issues that remain to be further explored,
including the potential for ecosystem accounting approaches to be applied at both macro and
micro levels.
Since the integration proposed requires bringing together quite different streams of
measurement, particularly with regard to ecosystem accounting, the first half of the paper
provides some introductory and background descriptions of relevant material. Thus, in section
2, there is some background to the development of the SEEA; in section 3, the ecosystem
accounting model is described; and in section 4, an overview of the growth accounting
method is provided. All of this background is to provide a frame for the integration of
ecosystem information. Section 5 discusses in conceptual terms the way in which ecosystem
services could be integrated into the standard growth accounting framework. Section 6
describes the key research questions and section 7 concludes.
2. Overview of the SEEA framework and its development
Development of the SEEA1
The potential and need to better integrate measures relating to natural capital within the
national accounts framework emerged through the 1970s and 80s (see Bartelmus, 1987;
Ahmad et al., 1989). Consistent with a request from the first United Nations Conference on
Environment and Development held in Rio de Janeiro in 1992 (United Nations, 1993a), the
United Nations Statistical Division led the drafting of the first international document on
environmental-economic accounting (United Nations, 1993b). This document, Integrated
Environmental and Economic Accounting, became known as the System of Environmental-
Economic Accounting or SEEA. It was an interim document prepared by the world’s official
statistics community to propose ways in which the SNA might be extended to better take
natural capital into consideration.
Over the past 20 years there has been an important broadening of focus in SEEA related
work. Through the 1980s and early 1990s the primary focus was on extensions and
adjustments to GDP, for example measures of depletion and degradation adjusted GDP, and
recording environmental expenditures. Discussion considered the range of ways in which
depletion and degradation might be estimated, valued and subsequently incorporated within
the structure of the standard national accounts and its various measures of production,
income, saving and wealth.
1 This brief history is taken from Obst (2015) which summarises the longer description in UN, et. al.,
2014a
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Through the 1990s this specific focus started to broaden to consider ways in which
accounting approaches and structures may be useful in the organization of physical
information on environmental stocks and flows such as water, energy and waste. This broader
application of accounting, which has been expanded further in recent years through the
development of ecosystem accounting, confronts the common conception that adoption of
accounting approaches necessarily relies on the valuation of nature in monetary terms.
Certainly there are questions that cannot be answered unless valuation is undertaken, for
example adjusting measures of GDP, but there are some important advantages of applying
accounting principles in the organization of data in physical terms.
The SEEA family
The SEEA 2012 comprises three volumes: (i) the SEEA Central Framework; (ii) SEEA EEA;
and (iii) the SEEA 2012 Applications and Extensions (UN et. al., 2014c)2. In addition,
various thematic SEEA publications have been developed including a SEEA for Forestry
(Eurostat, 2000); a SEEA Fisheries (UN and FAO, 2004); and SEEA Water (UN, 2012).
Work is almost complete on the development of a SEEA Energy and a final consultation draft
is currently under review on a SEEA for Agriculture, Forestry and Fisheries (SEEA
Agriculture).
All of these various publications within the SEEA “family” are connected through their
common basis in the national accounting principles and structures of the international
standard for economic accounting – the System of National Accounts (EC, et. al., 2009)
(referred to here as the SNA). It is the SNA that defines the measure of GDP and many other
common economic aggregates that form the basis for much macro-economic assessment and
policy. Indeed, the logic driving the development of the SEEA is (i) that the SNA’s
accounting for the environment is insufficient and (ii) that highlighting the significance of the
environment may be best achieved by mainstreaming environmental information via the
standard framework for economic measurement. Thus the SEEA is envisioned as a
complementary system to the SNA rather than a competing or alternative approach.
2 The third volume focuses on ways in which data organized following the SEEA Central Framework
can be applied to the analysis of various policy questions and linked to other datasets. It is not
discussed further here.
Box 1: The SEEA Central Framework and SEEA Experimental Ecosystem Accounting
Initially developed in the early 1990s, the SEEA is conceived as a comprehensive approach for the
organization of information concerning the relationship between the environment and the economy.
To provide a suitable coverage and to ensure that more recent developments on ecosystem services
could be incorporated, a two volume approach to the development of the SEEA 2012 was applied.
The first volume, titled SEEA Central Framework, views the environment in terms of individual
environmental stocks and flows and hence provides standards to account for variables such as
stocks of timber, fish, mineral resources and land, and for flows of energy, water, emissions and
waste.
The second volume, titled SEEA Experimental Ecosystem Accounting, views the environment as a
set of ecosystems such as forests, wetlands, grasslands and agricultural land. The ecosystem
accounting model describes the measurement of the changes in condition and extent of the stock of
ecosystem “assets”; and the measurement of the ecosystem services that flow from those assets.
There are connections between the two volumes (for example between the measurement of the
stock of timber resources and the condition of forests). The intention is that the different
perspectives are seen as complementary rather than competing approaches to accounting for natural
capital.
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This approach of integrating with the SNA leads to some important choices in measurement,
for example concerning valuation concepts, that may be different from the ways in which
environmental economists have traditionally approached assessment of the links between the
economy and the environment.
The various SEEA publications cover five different aspects of accounting, although to
varying degrees within the thematic SEEAs. These five aspects are:
(i) physical flow accounts for substances such as water, energy, solid waste and
emissions
(ii) asset accounts for individual environmental assets, such as mineral and energy
resources, timber resources, soil resources, water resources and fish stocks
(iii) accounting for stocks and changes in stocks of land and ecosystems and their
services
(iv) accounting for environmental transactions (including environmental protection
expenditure, the production of environmental goods and services, and flows of
environmental taxes and subsidies)
(v) a sequence of accounts and balance sheets including accounting for depletion and
degradation and adjusting relevant economic aggregates (e.g. GDP, national saving,
net wealth).
The SEEA for Agriculture, Forestry and Fisheries (SEEA Agriculture) emerged from ongoing
interest in organizing information for the purpose of analyzing the relationship between the
economy and the environment for agriculture, forestry and fisheries activities. The work has
been led by the FAO who are the leading international agency concerning data on these
activities. The SEEA Agriculture is expected to be finalized in early 2016. A short summary
is provided in Annex 1.
3. The SEEA EEA ecosystem accounting model
The SEEA EEA was developed through 2011 and 2012 to provide an approach to the
measurement and integration of environmental degradation within the standard economic
accounts. The definition and measurement of degradation has been an area of discussion and
contention within national accounting circles for more than 20 years. The work on SEEA
EEA was able to take advantage of the more recent developments in the measurement of
ecosystem services, such as presented in the Millennium Ecosystem Assessment (MA, 2005)
and the original TEEB study (TEEB, 2010). The SEEA EEA represents a synthesis of
approaches to the measurement of ecosystems adapted to enable integration with standard
national accounting concepts and measurement boundaries.
The full ecosystem accounting model is described at length in SEEA EEA chapter 2 and
readers are referred to that document for a detailed description. For the purposes of discussion
here Figure 1 provides a depiction of the general model.
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Figure 1: General ecosystem accounting model (SEEA EEA Figure 2.2)
Source: UN et al, 2014a
Five key features are noted:
(i) The delineation of spatial areas. Ecosystem accounting is focused on accounting for
ecosystem assets, each delineated by a spatial area. In the case of agriculture this could equate
to a single farm or to a broader area, such as a rice farming area, with the understanding that
each spatial area would consist of a similar vegetation type and cover. From a measurement
perspective, defining the spatial boundaries is fundamental since without such boundaries it is
not possible to consistently measure the condition and changes in condition of the asset or to
appropriately attribute flows of ecosystem services.
In addition, the use of a spatial basis for accounting is the embodiment of a systems approach
to accounting wherein both economic and environmental stocks and flows are considered in a
holistic fashion. However, the delineation of an ecosystem asset should not be equated with
definition of a farming or agricultural system which would commonly be considered to also
encompass a range of socio-economic factors (e.g. markets, institutions, government policies,
etc). Further, it is likely that a complete agricultural system would comprise more than one
type of ecosystem asset. For example, in a rice production system there would be rice fields
as well as neighbouring water sources and perhaps forest ecosystems.
Finally, for the purposes of integrating ecosystem information about the defined spatial areas
with standard economic accounting and productivity measurement, it is most useful to
consider this asset as a type of quasi-producing unit additional to the standard economic units
such as industries and households.
(ii) Measuring the condition of ecosystem assets. Each ecosystem asset (e.g. a rice farm) has
numerous characteristics (climate, soil, vegetation, species diversity, etc) and performs
various ecosystem functions. The integrity and functioning of the asset is measured by its
condition. It is the decline in overall condition, in biophysical terms, that underpins the
measurement of ecosystem degradation. At this point there is no finalized view on precisely
which characteristics should be monitored for each ecosystem type in order to provide an
appropriate assessment of the overall condition (current state) and the change in condition of
an ecosystem asset. Accounts for ecosystem condition and ecosystem extent (i.e. the area of
the ecosystem asset) are described in SEEA EEA. These accounts are compiled in biophysical
terms only.
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(iii) Measuring the flow of ecosystem services. Based on both the ecosystem asset’s condition
and the use made of the ecosystem asset (e.g. for rice production), a basket of ecosystem
services will be supplied. The ecosystem services supplied are matched to users/beneficiaries,
i.e. economic units including businesses, households and governments. An ecosystem
services supply and use account is developed in ecosystem accounting. The coverage of