69612 Moving Beyond GDP How to factor natural capital into economic decision making Moving Beyond GDP How to factor natural capital into economic decision making JUNE 2012 1 “Gross domestic product, the leading economic measurement, is outdated and misleading...It’s like grading a corporation based on one day’s cash flow and T he concept of gross domestic product first emerged out of crisis. The world was still mired in the this information helped to ensure that the most critical and efficient users got water. Now, Australia � forgetting to depreciate assets and other costs. Great Depression and another war was imminent. Governments wanted an annual measure of their has expanded its suite of natural capital accounts to include energy, minerals, land, and environmental — J. Stiglitz, Nobel prize, economics economies’ output so that they could manage their protection expenditure. wartime planning needs. Mexico is another early adopter of natural capital If crisis was a trigger to adopt GDP in the 1940s, accounting, starting in the 1990s with a “green GDP.� there is a crisis now that is calling out for a different This adjusted the country’s growth measure for measure. Our climate is changing, our fisheries are depletion of oil, natural gas, timber, and groundwater depleted, our soils are degraded, our water supplies while also accounting for the costs of degradation are overextended. We now need a measure that from pollution. goes beyond just the annual output of a country. We need a measure that looks at wealth in its entirety— Lack of information results in the overexploitation and combining produced, social, human, and, importantly, deterioration of natural assets. As GDP grows in the natural capital. short term, natural assets like forests and fisheries may be being depleted and so become unavailable for Both developed and developing countries are looking future generations. beyond GDP to help them address today’s challenges. A number of countries are already undertaking By fully accounting for minerals and energy, fisheries, natural capital accounting by compiling accounts water, forests, and ecosystems, countries can provide for water, energy, and minerals to be able to manage more accurate information to their policy makers. them better or to evaluate the trade-offs needed for This can lead to better economic decisions about making different development decisions. development priorities and investments. There is now a methodology to do this through the recently Australia suffers from frequent and more intense approved UN Statistical Commission’s System of droughts. In the 1980s, it decided to take a hard look Environmental and Economic Accounting. at how scarce water resources were being used. After debates and experiments over a methodology to It’s time to step up previously stated commitments compile accounts in the late 1990s, the government to implement natural capital accounting as a way to began accounting for how much water is used build a more sustainable world. by different sectors—agriculture, industry, and households—and the price these sectors were paying for consuming it. When drought struck again, 3 CHAPTER 1: A new balance sheet for a country J ust as private companies look at assets and liabilities on their balance sheets, it is in a country’s interests to produced capital. All countries measure national income but only a small number compile national balance keep an eye on its assets—and that includes natural sheets—or wealth accounts—and even fewer include capital. natural capital. Manufactured Human and capital social capital Wealth accounting—the balance sheet for a country— When countries do not take their natural capital into is a measure of all the assets that support human account, and only rely on GDP, “it’s like grading a well-being. These include produced capital from corporation based on one day’s cash flow and forgetting manufacturing, human capital including the education to depreciate assets and other costs,� said Joseph Natural capital of people, social capital including entrepreneurship and Stiglitz, winner of the Nobel Prize for Economics. innovation, and natural capital. Assets like water, forests, Wealth and other ecosystems that provide vital goods and When a country exploits its minerals or overharvests its services make up a country’s natural capital. forests, it is actually depleting wealth, yet this depletion is not reflected in the GDP. Truly comprehensive wealth GDP Doesn’t Measure… Together with GDP, wealth accounting provides a better accounting would go beyond the SNA to include Wear and tear and depreciation resulting from using produced assets like indication of prospects for long-term growth. GDP intangible forms of wealth such as human capital and factories, roads, and bridges. indicates if the economy is growing from one year to the benefits flowing from ecosystem services such as the next, while wealth accounts indicate if that growth is pollination and flood protection from mangroves. Loss of natural areas that provide ecosystem services to the economy, like pollination. sustainable. To achieve a “smart GDP,� countries need to move Extent to which renewable resources like forests and fisheries are being depleted. Since the 1950s, most countries have followed the UN toward comprehensive wealth accounting. This report Depletion of minerals and mineral fuels. System of National Accounts (SNA), which provides an focuses on one element of wealth accounting—natural ----------------------------------------------------------------------------------------------------------- international standard for measuring national income, capital accounting—and how countries can make better Future losses resulting from greenhouse gas emissions – sea level rise, extreme weather, and agricultural losses. savings, and some elements of wealth, including decisions by using it. Future economic losses when pollution leads to premature deaths and chronic disease. 4 What is natural capital? Why natural capital accounting forest and the mangroves that will potentially be lost bringing greater economic benefits to local communities in this process of conversion. These figures need to be than high-end tourism did. As a result of this analysis, is important comparable to the economic data related to infrastructure the government of Zanzibar can steer policies for the The usual symbols of progress include gleaming development. This enables more informed decision making maximum benefit of local communities, including jobs. skyscrapers, buzzing factory floors, or well-stocked In 43 countries classified as “low-income,� World Bank that is rooted in understanding the trade-offs around supermarkets. It is hard to appreciate links research has found that natural capital makes up 36 natural resource management. By overlooking ecosystem services, development decisions between the existence of these and a country’s percent of total wealth. Large populations depend on are inefficient. For example, over one-third of the world’s forests, rivers, and land. Natural capital includes, forests, minerals, and soil productivity for their daily Natural capital accounting enables countries to measure population lives in coastal areas and so is at risk from first of all, the resources that we easily recognize existence. As these countries grow and the pressure on who benefits and who bears the cost of ecosystem storms and extreme events like hurricanes and typhoons. and measure such as minerals and energy, timber, land and water increases, their natural resources may be changes. It can serve an important function in developing In some areas, ecosystems such as mangrove forests agricultural land, fisheries, and water. under increasing threat. They are often less able to cope approaches that target the poorest communities. provide protection against these natural hazards. Yet, with degradation and loss of ecosystems, a lifeline for decisions about coastal land use have not always taken this Many of nature’s vital services are often “invisible� many communities. Take, for example, Zanzibar. A large part of Zanzibar’s GDP important service into account. The example of mangrove to people. These include air and water filtration, is generated by tourism. The Earth Institute and the Pew forests in Thailand shows how coastal storm protection Countries depend on natural capital in a variety of ways. Foundation helped conduct a detailed natural capital from mangrove forests can outweigh the private benefit of flood protection, carbon storage, pollination for Globally, more than 250 million people depend on ocean accounting exercise to understand Zanzibar’s coastal conversion to fish/shrimp ponds. crops, and habitat for fisheries and wildlife. These fisheries and aquaculture for livelihoods. In Madagascar, wealth. These accounts showed that budget tourism was values are not readily captured in markets, so their 75 percent of the population depends on terrestrial and contribution to the economy and livelihoods is not coastal ecosystems. Costa Rica uses its watersheds to recorded. These services are taken for granted and generate 85 percent of its electricity from hydropower. a country does not know what it would cost the Botswana’s key to economic diversification may lie in economy if these services were lost. nature-based tourism supported by its rich ecosystems. For example, forests are typically recorded in GDP It’s not just developing countries that rely on natural Wealth of Low-Income Countries as providing timber. The fact that they sequester capital. The UK’s recent National Ecosystem Assessment, for example, demonstrated how the economy, human Natural Capital Composition carbon is not counted. Other services, like water 2008 dollars Per Capita regulation, are not captured in national accounts as health, and well-being depends on ecosystem services that have been rapidly degrading. Similarly, a large share of Total Wealth 7670 a value of the forest. At best, this is reflected as an 77% Australia’s tourism industry is dependent on the health and agricultural output in a country’s GDP. Produced Capital 1,117 well-being of the Great Barrier Reef. Natural Capital 2,403 9% 9% 5% Like other forms of capital, natural capital requires Intangible Capital 4,290 investment, maintenance, and good management if it is Net Foreign Assets -141 to fully contribute to increasing output and prosperity. Natural capital accounting is a tool that can help measure Crop, Pasture Land, Forest Protected Areas Energy Minerals the full extent of a country’s natural assets. When faced with critical decisions like whether to build a road through a forest or clear mangroves to build a port, countries need data on the value of the services provided by the 6 Making an informed decision about mangroves Mangroves in Thailand - The December 2004 tsunami was a wake-up call to products) values mangroves at $955 per hectare—a several Indian Ocean nations. Over the past 20 years, paltry sum in comparison to the potential $10,949 per convert or conserve? these countries have replaced the most effective hectare from farming shrimp. barrier to ocean forces—mangroves—with shrimp $25,000 Decision: CONVERT Decision: CONVERT Decision: CONSERVE farms, tourist resorts, and urban sprawl. One of the He then considered the mangroves’ natural “barrier� $21,456 reasons is that mangroves are undervalued in economic service. If mangroves were cleared for shrimp farming, calculations, making it easier for governments to divert this service would be lost. Adding in the role of Value per hectare in dollars them to other uses. $20,000 mangroves in coastal protection, their value rises to $18,641 per hectare, far greater than the benefit from Edward Barbier, an environmental economist, did a shrimp farming. calculation to estimate the true value of mangroves by $15,000 putting a price tag on some “indirect services� like their This information facilitates the decision not to convert. $10,649 $10,649 role in coastal protection, as breeding habitat, and their If the mangroves’ ability to store carbon as well as their ability to store carbon. role as a nursery and breeding habitat for offshore $10,000 fisheries are considered, the value further increases He considered a scenario in where in Thailand, policy to as much as $21,456 per hectare. Unfortunately, by makers were faced with the following decision: to relying on conventional economics, significant tracts $5,000 convert mangrove forests for shrimp farming or to of mangroves in the upper Gulf of Thailand have been $955 $955 $1,349 leave them intact. The decision may seem simple on removed to make way for shrimp farms and for coastal the surface: accounting for marketed goods (coastal and industrial development. $0 communities’ harvesting of various wood and non-wood Value of Value of Value of Value of Value of Value of mangrove converted mangrove converted mangrove converted mangrove mangrove mangrove Scenario 1: Scenario 2: Scenario 3: accounting only for accounting only for accounting for the total marketed products marketed products, value of the mangrove adjusted for subsidies Carbon sequestration Wood and non-wood products Fish habitat Shrimp farming Coastal protection from storms Source: Based on E. B. Barbier, “Ecosystem Services and Wealth Accounting,� in UNU-IHDP and UNEP, Inclusive Wealth Report 2012 (Cambridge University Press, 2012). All figures in 2000 US dollars. 8 Measuring natural capital Nature’s services The idea of accounting for clean air, clean water, forests, This system relies on basic environmental statistics on and other ecosystems has been around at least since the water, energy, forest, and pollutants. Some of these are Ecosystems are dynamic systems in which Earth Summit in Rio in 1992. One of the reasons it did not already being collected by relevant departments in living organisms, like plants, animals, and gain traction was the lack of widely agreed methods for governments around the world. By implementing SEEA micro-organisms, interact with the non-living putting monetary values on these services. Consequently, guidelines, governments can add value to individual environment. They range from the relatively most of the efforts by countries were experimental. Lack components, using them to inform policies, evaluate undisturbed, natural forests to systems intensively of political will to implement accounts on the ground has trade-offs between different policies, and assess managed and modified by humans, such as also hampered progress. their impacts across domains of the economy, the agricultural land and urban areas. environment, and society. In February 2012, the UN The UN’s Millennium Ecosystem Assessment Statistical Commission When natural capital is (MEA) established a new way of thinking about approved the System mainstreamed into economic and monitoring the state of the environment and of Environmental and accounts, it can inform analysis its relationship to the economy. They called this Economic Accounts and development decisions. “ecosystem services,� the benefits people obtain (SEEA) as an international It is this link that makes SEEA from ecosystems. The MEA classified these values statistical standard like an effective tool to engage into four areas: the System of National ministries of finance and Accounts (SNA). This planning. • Provisioning services such as food, water, was a fundamental leap timber, and fiber forward for natural capital The SEEA framework has been • Regulating services, providing natural accounting. Now, natural endorsed by the UN Statistical protection against flood, drought, capital accounting can Commission, which is a body degradation, and disease be implemented at scale. of heads of statistical offices • Cultural services, including recreational, The SEEA standards cover material natural resources like from all countries and international organizations like aesthetic, and spiritual benefits minerals and timber, as well as accounts for environmental Eurostat, the IMF, OECD, UN, and the World Bank. Over • Supporting services such as soil formation, protection expenditures, taxes, and subsidies. time, countries are expected to implement statistical photosynthesis, and nutrient cycling. standards using SEEA, as they have done with the SNA. SEEA does not aim to replace or change the most Source: Millennium Ecosystem Assessment, 2005 commonly used measure, GDP—it fits alongside the The methodology for ecosystem accounting is still current SNA as a set of “satellite accounts.� Countries then experimental—more work is needed to determine how develop accounts that target their key policy concerns— best to assign values to all aspects of ecosystem services. say, water accounts in Botswana, fisheries accounts in the Work is under way to refine this for the second phase of Philippines, and land accounts for the contributions of the SEEA. forests in Costa Rica. 10 Monetary valuation for ecosystem accounting Ecosystem services have different kinds of values for people: Direct use value: Individuals directly use an ecosystem service, for example by extracting resources from the ecosystem (such as food, timber) or from nonconsumptive use, for example for recreation. A wilderness area, for instance, provides direct use value to visitors who hike, kayak, and enjoy the scenery. Indirect use value: Individuals benefit from ecosystem services supported by a resource rather than directly using it. Lower organisms on the aquatic food chain, for example, provide indirect use values to fishers who catch the fish that eat these organisms. Indirect use value is generated by both global life-support functions (such as climate regulation) and local life support functions (such as water regulation, soil retention, nutrient cycling, pollination). Option value: People value having the option to use a resource in the future even if they are not using it in the present. For ecosystems, the option value describes the value placed on maintaining ecosystems for possible future uses, some of which may not yet be known (there may be plants with unknown medicinal uses, for example). Non-use value: This is derived from the fact that the natural environment is maintained, including both the value individuals attach to the existence of the ecosystem resource as well as its availability to others (in current as well as future generations). The further we move from direct use value toward indirect use value, option value, and non-use value, the more difficult it becomes to measure values. At one end of the spectrum we have goods such as timber, which is traded on the market and whose value can be directly observed. Measuring indirect use values (for example, the value of water regulation) can be challenging. It is often done by conducting surveys or observing other markets that can give proxy values. This challenge applies even more to option values. It is challenging to measure non-use values, since this can only be done through survey-based methods, which raise even greater issues of reliability and robustness. Natural capital accounting can be a powerful tool for policy makers grappling with trade-offs in a growing economy. Environmental economists are developing measures for the value of ecosystem services—these vary in terms of While work is progressing on a methodology for ecosystem valuation, there is an internationally approved method to reliability and also the extent to which their results fit into the framework of the national accounts. SEEA phase 2 value some elements of natural capital, like forests, minerals, and water. aims to resolves issues around ecosystem valuation. In chapter 2, we will see how some countries are already measuring natural capital or compiling accounts to answer key policy questions. The private sector too is stepping up and building a critical mass of companies and financial institutions interested in accounting for natural capital. 12 13 CHAPTER 2: N atural capital accounting is a tool for policy at Nagoya, Japan, in 2010, provides a clear target on Better Decisions makers that is being used for informed decision making Natural capital accounting. It recommends that by 2020, in developing and developed countries. biodiversity values are to be integrated into national and local development and poverty reduction strategies and Some 24 countries now regularly compile at least one incorporated into national accounting and reporting account (see map). Developing countries like Mexico, systems. The United Kingdom has established a Natural Colombia, the Philippines, and South Africa are compiling Capital Committee to advise the government on integrating accounts ranging from energy and water to how the value of natural capital into their national accounts. minerals and timber contribute to national economic growth. Uptake in Europe is strongly influenced by EU Across all countries, the most widely implemented regulations mandating certain accounts. accounts are flow accounts for energy, air emissions, and water. Asset accounts focus on minerals, oil and The Strategic Plan for Biodiversity 2011–2020, agreed gas, forests, and land. Among developing countries, at the Convention on Biological Diversity meeting Mexico stands out with the most extensive, regular implementation of natural capital accounts. Connecting accounts and key policy issues Issues faced by policy makers How natural capital accounting can help How to increase the contribution of coastal Ecosystem accounts can help determine how ecosystems to the economy the management of coastal ecosystems can be improved and who will benefit How to plan hydropower development Land and water accounts can help assess the value of competing land uses How much finance to provide for protected areas Land accounts can help determine the full value of protected areas by adding up the potential contribution from tourism, climate regulation, and water supply provision How to manage tourism and biodiversity hotspots Location-specific tourism accounts can help determine the contribution of nature to tourism to ensure long-term sustainability 15 At the macroeconomic level, ministers of finance need management strategy that balances trade-offs between to know whether or not their development strategies ecotourism, agriculture, and ecosystem services like Business getting on board are laying the basis for long-term economic growth. For flood protection and groundwater recharge. Nearly 50 example, in a mineral-rich country like Botswana, these countries are now also doing water accounts. These The Coalition is working closely with the HRH Prince Leading global financial institutions like RaboBank, accounts help answer questions like: What is the extent accounts provide detailed information on the use and of Wales’ Accounting for Sustainability Project, Standard Chartered, and National Australia Bank of resource rents being generated and can these be price of water that helps governments decide how to IUCN, and WWF-UK with the goal of expand the have committed to voluntarily integrating natural increased? Can resource rents be invested in other assets, allocate water most efficiently. Currently, statistics on the concept of corporate “performance� to include the capital accounting into their products and services. providing the basis for sustainable growth? magnitude of water abstractions are often estimated environmental impacts of companies. They, along with other CEOs and financial institutions, rather than based on reliable data. Classifications of have endorsed the Natural Capital Declaration Without natural water users are rarely Some companies are leading. The sports company (NCD), which commits them to integrating natural capital accounting, disaggregated in this way. PUMA is among the first in the world to do capital considerations into private sector reporting, governments are Australia, Mexico, and the Environmental Profit and Loss Account. Its 2010 accounting, and decision making. underestimating the Netherlands are pioneers accounts showed the environmental impact for true contribution of in this area. Unlike governments, who have a standard some key areas of PUMA’s supply chain—water use, their natural resource methodology to measure natural assets provided land use, air pollution, and waste. sectors. The Millennium It is often the poorest by the SEEA, financial institutions and companies do Ecosystem Assessment communities who bear not yet have an internationally agreed framework CEOs of leading corporations like ASDA and found that in a number the brunt of degraded to adequately report or account for natural capital. Unilever have signed on to a Natural Capital of countries, the ecosystems. Natural The NCD signatories, together with the International Leadership Compact—a call for action by leaders timber value of forests capital accounting Integrated Reporting Committee, will work to build of global companies convened by the University accounted for less can provide a tool to standardized methods of reporting. of Cambridge Programme for Sustainability than a third of total assess who benefits Leadership. These companies pledge that they will economic value of all and who bears the cost Another initiative called the TEEB (The Economics of operate within the limits of natural systems, identify forest ecosystems. This is of ecosystem changes, Ecosystems and Biodiversity) for Business Coalition and address the “un-costed� impacts on people and because information on helping governments has been convened by the Institute of Chartered the environment (externalities), enable consumers the value of non-market goods and services, particularly gauge whether growth is inclusive. An analysis of where Accountants in England and Wales. to make better informed choices, and develop environmental services provided by forests, is often the rents go, for example, from mining or tourism can rigorous and realistic targets and plans. missing. For this reason, Spain is devoting significant help guide policies. effort and resources to forest and land accounts for the economically important region of Andalucia. This Global commons—like fisheries—are degrading in part information will help the government manage the area because there has been no effort to estimate what they better and design a tourism policy for Andalucia that is are worth. Better data can show how poor management not at odds with sustainability of the region. can lead to lost rents—especially to developing Land accounts are helping Australia design a economies. 16 17 COUNTRIES IMPLEMENTING NATURAL CAPITAL ACCOUNTING Source: UN Statistics Commission Note: The information on accounts being compiled by countries is not exhaustive. 18 19 SPAIN Managing Andalucia’s rich resources Policy question: How to manage the global Purpose of the accounts: biodiversity hotspot region of Andalucia? Evaluating trade-offs for development: When Context: Traditionally, Andalucia’s ecosystems building roads or bridges, these accounts show were managed for timber, cork, hunting, and which parts of the forests store more carbon and livestock grazing. As pressures on the forest are worth preserving or how much compensation A tool for policy makers grew, policy makers realized the ecosystems were is to be paid to local residents for commercial Here are some examples of how countries are already exploring natural capital accounting and are using it in their worth much more. The region provides ecosystem revenue lost as a result of the road. decision making. services—public and private recreation, forest Public buy-in for millions spent on fire protection in produce, carbon storage, and biodiversity—whose • In the Philippines, environmental accounts for heavily degraded Manila Bay motivated the Supreme Court the region: The accounts map fire expenditures and values are not readily observable in markets. in 2008 to mandate a massive cleanup to avoid the impacts of illness expected to cost $7 million, reduce fish help in determining whether the money is being export losses resulting from algal blooms (worth $29 million), and protect mangroves whose direct benefits reached $150 million in the early 2000s. The Philippines also used environmental accounts to establish entry The challenge was how to develop the area while spent on the forest with the greatest value. This fees for some of its national parks, resulting in doubling of income from these fees. making sure that it continued to provide the other helps in communicating and justifying the public ecosystem services in the long run, including expenditure on protection against forest fires. • The Norwegian Ministry of Finance has integrated its energy and air emission accounts into the drawing millions of tourists annually. macroeconomic model used for policy planning. This helps the country decouple economic growth and Setting entry prices for tourists: One part of the land energy consumption. While Norway’s gross national income grew by 50 percent between 2000 and 2010, its greenhouse gas emissions remained steady at 54 million tons of CO2 equivalent since 2000. Four years ago, the government decided to spend accounts involves using the Simulated Exchange $9 million on building a detailed set of land Value tool, which determines the amount of • The Netherlands uses natural capital accounts to monitor its economic growth in relation to the accounts related to its forests and the complex money tourists would be willing to pay to visit a environmental impact of that growth. The accounts monitor changes in GDP along with changes in national system that they support. While most of it follows particular area of Andalucia. energy and materials use as well as trends in emissions. This helps the Netherlands reduce environmental degradation even as the economy grows. GHG emissions have been declining since 2005, making the 20 the SEEA methodology, they are pushing to percent EU emission reduction target by 2020 attainable. develop their own ecosystem accounts. 21 Box 4 Accounts provide environmental, economic, and AUSTRALIA social information for each of the five natural resource management regions of the GBR catchment. Protecting the Great Barrier Reef Current emissions discharged to the Great Barrier Reef lagoon 2010 Total suspended solids Total Total PS11 nitrogen phosphorus herbicides Natural Resource tons/yr tons/yr tons/yr kg/yr Mgmt Region Cape York 2,388 2,998 1,516 n/a Wet Tropics 1,350 4,400 2,037 10,054 Policy question: How to protect the Great Barrier To help manage the GBR for long-term protection Burdekin 4,738 2,446 2,555 4,911 Reef from threats upstream? and sustainable use, the Great Barrier Reef Land Mackay-Whitsundays 1,542 912 2,172 10,019 Account was constructed. The GBR Land Account Context: The Great Barrier Reef (GBR) Marine provides detailed environmental, economic, and Fitzroy 4,109 1,672 4,142 2,269 Park is a globally significant World Heritage site social information for each of the five natural Mary Burnett 3,076 1,463 3,092 990 with one of the most diverse and healthy reef resource management regions of the GBR Total Great Barrier 17,213 13,891 15,514 28,243 ecosystems in the world. It is of great economic as catchment. This work was so important that it fed Reef region well as heritage value, generating around AU$2,257 into developing the SEEA’s Central Framework. million from tourism a year (2006–07). Despite this, it is threatened by declining water quality due Purpose of the accounts: to catchment runoff, loss of coastal habitat from development, fishing impacts, and climate change. Monitor activities that impact the reef: The accounts identify major sources of nutrient and soil While the coral reef itself has been subject to runoff, as well as the land value, crop value, and careful management, many of the threats to this employment. valuable ecosystem originate outside the GBR, especially from land use practices around the Calculates the economic cost of constraining these rivers that drain into the reef. Land management activities: The data help to compensate farmers practices in agriculture (such as tillage methods for not using farming practices that affect the reef and volume of fertilizer applied) have a downstream. particularly strong impact on the levels of nutrient and sediment runoff. 23 MEXICO Experience with water accounts Mexico was among the first developing countries —agriculture, drinking water, thermoelectricity, and to compile water accounts following the SEEA industry. The productivity is calculated as the ratio guidelines. of value added per cubic meter of water abstracted. Agriculture consumes 77 percent of inland water Working closely with the UN Statistical Division, resources. The growing demand for water in cities the process has helped consolidate data that often competes with agriculture and environmental existed with different agencies and ministries water requirements for rivers. The volume of water within the government. This information helps the allocated through a permit system in several government design programs to promote more watersheds is larger than the total renewable flow. efficient use of water, such as the establishment of The result is that several aquifers are overexploited— water markets. extraction is greater than recharge. There is better information on water-related The National Institute of Statistics and Geography emissions too—the volume of untreated and the National Water Commission of Mexico wastewater, for example, helps derive other have worked together to compile preliminary indicators on the health of the water systems. Work water accounts that are useful for monitoring the remains to be done on translating these data into changes occurring through the years. They are able indicators for use by policy makers. to calculate the productivity of water for some of the main activities that use inland water resources 24 25 ZANZIBAR Accounting as a tool to promote inclusive development Income from types of tourism, Zanzibar, 2007 ($ ‘000s) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 All-inclusive, Large-scale, Small-scale, Mid-range Budget ‘club’ up-market up-market Non-Zanz Zanz Gov Other Zanz Local Zanz Zanzibar’s coastal and marine ecosystems income. But only 20 percent of this accrues to the local for tourism arrivals without taking social and Budget tourists are also more likely to engage in contribute 30 percent of its GDP through tourism, communities who steward the resource. environmental impacts into consideration. activities that depend on a healthy ecosystem, fisheries, and seaweed farming, yet the ecosystem like diving and snorkeling, creating incentives for The challenge Zanzibar faces, like many other The government of Zanzibar undertook coastal sustainable management. This information enables is seriously degraded. With fish stocks already developing countries, is how to increase the management accounts. The analysis showed that the government to develop policies around depleted and seaweed prices low in global markets, participation and benefits from tourism flowing to local budget and small-scale tourism mostly benefits tourism geared for the maximum benefit to local tourism is the best chance for growth and already communities. Conventional wisdom is to set targets local communities, while the benefits from “club� communities. generates a significant proportion of the country’s and large-scale tourism mostly accrue to outsiders. 26 27 Fisheries wealth accounts reveal a lost opportunity Ocean fisheries and aquaculture support close to 250 a loss with negative resource rents—that is, in most million livelihoods around the world and produce fisheries, it costs more to catch fish (taking subsidies seafood worth nearly $190 billion per year. But into account) than the product is sold for. overfishing and other impacts on global fisheries are taking a heavy toll. Almost 85 percent of the world’s This makes a strong case for rebuilding the world’s ocean fisheries are fully exploited, overexploited, or fisheries by defining clear access rights, removing depleted, resulting in large economic losses and serious harmful subsidies, and cooperatively managing shared threats to the livelihoods of the poor. fish stocks. This can result in potentially enormous economic gains: global fisheries wealth is estimated The World Bank teamed up with the University of to increase from $120 billion to $900 billion, with the British Columbia’s Fisheries Center to fill the gap for potential for the greatest gains in Asia. the wealth of marine fisheries, based on recently developed methodologies. The purpose was to provide While fisheries may be a small contributor of total a first estimate of wealth on the global scale, this resource stock is wealth accounts particularly for global marine important for fisheries—what small Island it is now and developing what it could states (SIDS). be under better When fisheries management. are rebuilt and sustainably The accounts managed, SIDS show that across all regions under current benefit with management, substantially no region is higher levels of getting close wealth, tripling to the potential in value from economic benefits $15 billion to their fisheries $68 billion; in could generate. A majority of countries in Africa, Oceania, rebuilt fisheries stock would account for a Europe, and North America are currently operating at potential 52 percent of total wealth. 28 CHAPTER 3: A Partnership for Progress Growing demand Increasingly, ministries of environment and planning want data that can help them negotiate for budgetary Botswana’s diamonds have been the mainstay of its resources from finance ministries. By showing the economic growth for decades. Now the country in contribution of natural capital to national income, southern Africa is looking to diversify its economy. Can they can effectively build a case for increased budget its unique natural ecosystems provide a new stream of allocations and investment. Ministries of finance want to revenue and growth? use macroeconomic indicators like adjusted net savings in addition to GDP to provide them with a different lens At the same time, biodiversity-rich Madagascar wants on economic growth. to know how to finance more than 60,000 square kilometers of protected areas. And the Philippines, With the recent approval of the UN Statistical worried that its marine ecosystems may be threatened Commission’s System for Environmental and Economic by climate change, wants to know the exact Accounts, there is now a method to account for contribution that fisheries make to its economy so it can material natural resources like minerals, timber, and improve overall management fisheries. Challenges remain on the implementation side, and many countries are now reaching out to These developing economies are looking for the international community for assistance to help information that can help them make these kinds understand natural capital accounting better. of critical decisions. Countries want to go beyond the single GDP number and focus in on sectors like water, forests, energy, and minerals to understand the dynamics of their economies better. Some natural resource–rich countries are starting to factor natural capital into their national accounts to fully reflect the contribution of these assets to their economy. 30 Shifting perceptions Where once there was little experience to draw upon, a global community of practice is gradually building up For years, countries have been concerned that measuring to design training programs for the implementation of and reporting natural resource depletion and degradation SEEA—similar to those that exist for the SNA. might affect their economic performance. Increasingly, governments are recognizing that natural capital accounting is a tool for better decision making. Its links to The WAVES partnership improved policy is gradually becoming more explicit. To support countries with the move to natural capital accounting, the World Bank initiated a partnership However, the reality for many countries is that even called WAVES—Wealth Accounting and the Valuation national accounts pose a challenge. GDP is a culmination of Ecosystem Services—which includes several UN of thousands of data points from multiple areas of the agencies, national governments, NGOs, and academic economy. Collecting reliable data requires effective and other institutions. institutions as well as trained economists and statisticians. Countries that struggle with national accounts want to be WAVES works as a global partnership. It includes sure they have the support and resources to undertake developing countries—Botswana, Colombia, Costa natural capital accounting effectively. Rica, Madagascar, and the Philippines—all working to establish natural capital accounts. It also includes sharing lessons—for example, Australia, a veteran in Perceived challenges around natural capital How WAVES can help developed countries like Australia, Canada, Denmark, water accounts, has offered to guide Botswana. accounting France, Japan, Norway, Spain, and the United Kingdom that are already exploring natural capital accounting All partners share a common vision of a world where Need a standardized methodology Implement the recently approved UN Statistical valuing the environment leads to better decisions and have valuable lessons. UN agencies—UNEP, UNDP, Commission’s SEEA methodology on material and the UN Statistical Commission—are helping to for development. The partnership will nurture a accounts implement environmental accounting in countries and community that shares experiences and expertise and Work with the UN to develop a globally review scientific evidence and methods. The WAVES raises awareness of the importance of natural capital recognized methodology partnership is currently supported by founding donor- accounting in moving toward more inclusive, green partners to the Multi-Donor Trust Fund, including Japan, growth. How country policy issues can be addressed Demonstrate policy links and work with national through natural capital accounting governments to identify policy priorities the United Kingdom, Norway, and France. Need support for countries to compile data Provide technical and financial support to The first priority of WAVES is to implement the SEEA and WAVES objectives countries to build capacity use the methods that are internationally recognized. The WAVES partnership design is based on the Need proof that natural capital accounting Compile evidence from across countries already The second is to help develop an agreed methodology experience and feedback from countries that have works effectively doing this for measuring ecosystem services. Some countries been experimenting with natural capital accounting for are ahead of the learning curve and are interested in over 20 years. Their experience helped refine the SEEA 32 33 methodology while highlighting areas where interventions could help countries the most. Key objectives include: Demonstrating policy links: In WAVES partner countries, the primary aim is to link policy with natural capital accounts. In every country, work begins with identifying the most pressing policy questions and relevant sectors. National Steering Committees are critical to ensuring that these accounts are used to support better, strategic decision making. Compiling a body of evidence: A WAVES Policy and Technical Experts Committee leverages knowledge and Moving toward a methodology for measuring ecosystem services experiences from all partners. The committee is compiling a body of evidence about the policy uses of natural capital The WAVES Policy and Technical Experts Committee To achieve these goals, the committee will accounts. (PTEC) is an important component of the WAVES commission technical papers and organize partnership and is made up of specialists in workshops to develop standard methods and will Communicating what works: WAVES has a strong economics, natural sciences, accounting, and policy test them out jointly with partner countries. communications component that aims to promote natural capital accounting globally. The partnership will develop from institutions and countries across the world. Together with the UN Committee of Experts on training materials, support a Web-based knowledge portal, Some of its goals: Environmental Accounting, the WAVES PTEC and engage in the global dialogue about environmental will support development of materials for accounting. • Develop an internationally agreed implementation of the SEEA. This could include methodology for ecosystem accounting, online training courses, a diagnostic tool for SEEA Working on the next set of methodologies for SEEA: particularly monetary accounts, so that it assessment comparable to diagnostics available The SEEA’s “central framework� approved in 2012 covers can be incorporated in the next phase of for the System of National Accounts. certain components of natural capital. The UN Statistical SEEA. Commission has agreed to a process toward development For this work, the PTEC will reach out to private of similar standards for ecosystems and other natural • Provide technical support, training, sector groups working in parallel on standardized assets. The WAVES partnership will play a key role in and quality control for natural capital measures for corporate accounting, regional developing the monetary component of the accounts and accounting in WAVES partner countries networks of environmental economists like will ensure that this work feeds into the next phase of SEEA. based on SEEA’s Central Framework. Environment for Development, the South Asian Capacity building and training: WAVES provides Network for Development and Environmental • Compile a body of evidence that shows intensive technical support to its implementing partners Economics, and think tanks like the International how natural capital accounting can be and is developing a knowledge portal to facilitate training Institute for Environment and Development. used for better decision making. and knowledge sharing between countries. 34 WAVES road map it could consider building water and land accounts to WAVES PARTNER COUNTRY: BOTSWANA help assess the trade-offs involved. Countries have many different reasons for undertaking natural capital accounting and a range of policy Design a work plan: Having identified the key Botswana is rich in natural resources. A combination of “Botswana has done really well with How WAVES is helping: applications. This highlights the need for a road map to policy entry points, a country can begin charting an diamonds but at current production levels, To meet all three development minerals, energy, protected areas, assist countries wanting to undertake natural capital implementation plan. It is not necessary to compile crop and pastureland, and non- they are running out. We are looking at goals, the government will accounting. WAVES has designed a step-by-step process all natural capital accounts at once. Countries can timber forest products make whether natural resources, especially need to use resources like for implementation: start with those that are most policy relevant and the country’s natural capital ecotourism, can contribute to economic water and energy sources technically feasible. A country may choose to start with worth a third of its total wealth. diversification.� efficiently, mine sustainably, Build political will: In many countries, a decree, This natural capital already and invest these resources forest accounts that only account for timber and non- plays a huge role in supporting — Ruud Jansen, Poverty Environment back into the economy. But executive order, or law mandating natural capital timber goods (where there is international agreement accounting may be necessary to ensure continuity Botswana’s economy—providing Initiative, Botswana the economic information on methodology) and later compile accounts for the food, fuel, shelter, and livelihoods needed to take these steps over the long term. WAVES helps countries design and ecosystem services provided by forests like carbon while underpinning key activities, is incomplete or missing. develop strategies for building political buy-in. sequestration, water, and sediment control. such as diamond mining, which Botswana’s scoping study under the WAVES program seeks to Build institutional ownership: Partner countries begin Mainstream into economic policy: The work does not has dominated Botswana’s economy for more than 30 answer such questions as: Is by establishing an institutional structure with strong stop at compiling accounts. It is important to use the years. Botswana has ploughed Botswana’s economic growth commitments from the national government and clear information generated by these accounts to inform the a significant proportion of its path sustainable in the long lines of responsibility across government departments. policy debate. Communicating results among policy resource rents from mining term? What is the ideal energy Experience has shown that this effort is most successful makers, the private sector, and civil society, among mix, and how should Botswana into building human and if led by a user of the information with a broad mandate other stakeholders, helps deepen the impact of these use its vast coal reserves? How manufactured capital. This has —for example, ministries of planning, environment, or accounts. should limited water resources helped make Botswana the fourth finance. A lead agency as a champion is key to building be used? And how can tourism richest country in Africa. support across government. The WAVES partnership contribute to long-term growth, diversification, and works closely with the agency responsible for compiling Critical decision: poverty alleviation? national income accounts. Institutional Although it is a middle-income country, 21 percent of The government has indicated a strong commitment to Ownership Political Assess policy entry points: Implementation is most Botswana’s population still lives below the poverty line. the WAVES partnership, and a Botswana WAVES Steering Will Estimates show that diamond reserves will run out in Committee has been established, chaired by the Ministry successful when focused on critical natural resource issues and key policy entry points for a given country. a few decades. Keen to stimulate growth, diversify its of Finance and Development Policy. The Committee closely Road Map economy, and eradicate poverty, Botswana has identified working with the UNDP-UNEP Poverty-Environment When natural capital accounting can be shown to make Workplan several options for development that include nature-based Initiative will focus on building accounts on minerals, a difference for development policy over a relatively tourism and expanded mining and agriculture. Policy energy, water and land/tourism, and livelihood. Botswana short time frame, the effort is likely to be sustained. makers want to know how Botswana can optimize its has a long-standing tradition of economic planning for National development plans and annual budget Policy natural resources while also improving its management development and prepares a National Development Plan. discussions can help identify key policy entry points. For Links and further building social capital. The WAVES work plan, running through 2015, is expected example, if a country has identified hydropower as a way Data to make this planning process reflect the true value of to meet energy needs, then to implement this efficiently, natural resources and its ecosystems. 36 37 WAVES PARTNER COUNTRY: MADAGASCAR WAVES PARTNER COUNTRY: THE PHILIPPINES Madagascar’s biodiversity is undoubtedly its biggest High growth in the Philippines in the 1960s drew government wants to know how to meet food security asset. Approximately 90 percent of all plant and animal substantially from the country’s rich natural resources. targets while ensuring sustainable use of land and water, species found in Madagascar are endemic. The country’s This led to the loss of forests, fisheries, and upland how to develop mining and tourism while protecting protected area network, spanning soils. Fishing was found to be operating at twice the critical ecosystems and sustaining livelihoods, and how to 6.9 million hectares, attracts up to economically sustainable level and major cities were improve management of agriculture and fisheries while 130,000 visitors every year. Terrestrial also growing rural incomes and increasing the sectors’ blighted with high levels of air pollution. While the forests and coastal and marine natural economy has since diversified through manufacturing resilience to climate change risks. resources are already playing a huge and the services sectors, role in supporting Madagascar’s How WAVES is helping: economy—fisheries contribute 7 a third of the population percent of GDP and the mining sector that depends on New political leadership is expected to contribute 15 percent natural resources for in the Philippines is of GDP in coming years. Natural livelihoods remains emphasizing transparent capital represents roughly half of poor. Important steps and science-based Madagascar’s wealth. But there is no have been taken to decision making while detailed quantitative analysis of this wealth. promote community- pursuing inclusive and based natural resource sustainable growth. Critical decisions: management and WAVES is working with In addition to historic pressures like deforestation and initiate user fees for the government to overexploitation of marine resources, Madagascar is ecosystem services. But generate data that can inform the public dialogue on now seeing the rapid expansion of large-scale mining. these are yet to reach a scale that generates needed natural resources use. This has been given a mandate The country needs information to manage the trade-offs impacts on resource conservation, poverty reduction, through an executive order and a draft bill on the associated with mining as well as allocating adequate and government revenue. Philippine Economic, Environmental and Natural funding for protected areas. The country is highly the economy. Through WAVES, it is identifying the sectors that will help provide the data needed for decisions critical Resources Accounts to be led by the National Economic vulnerable to natural disasters, including cyclones, Critical decisions: to the country’s growth. The first priority was developing and Development Authority. droughts, and flooding. It is estimated that one-quarter of the population lives in high-risk zones for natural disasters. macroeconomic indicators like adjusted net savings The country now faces big challenges in pursuing inclusive, This is expected to intensify with climate change. To plan and adjusted net national income to assess whether high economic growth targets while addressing gaps Catalytic funding from the WAVES partnership will help well for its future, Madagascar wants to know how to tap Madagascar is building or depleting national wealth. The in governance, high energy costs, and an increasingly bolster efforts by key agencies to compile accounts for protected areas for economic returns, how to distribute sectors that were identified for creating detailed accounts degraded environment. It also faces significant risks from minerals, land, water, coastal ecosystems, and tourism mining revenues fairly, and how to protect its natural assets included the mining sector, fishing sector, tourism, and natural disasters that are becoming more frequent and to develop better indicators for the economic sectors to improve disaster risk reduction. water. natural capital accounting is expected to contribute intense as a result of climate change. The Philippine that use ecosystem services. Economists will work to medium and long-term policy dialogues on resource Development Plan 2011–16, identifies 10 industries with environmental specialists and social analysts to How WAVES is helping: rent recovery, distribution, and investment in the mining with high potential for generating jobs. Four of these examine options for attaining economic growth targets sector. Currently, Madagascar’s national accounts make almost depend on land and coastal ecosystems—mining, in ways that benefit indigenous populations and local no reference to natural capital despite its importance to agri-business, tourism, and forest-based industries. The communities while sustaining natural capital. 39 Further Reading I n the 20 years since the Earth Summit in 1992, economic growth has lifted 660 million people out of Wealth Accounting and Valuation of Ecosystem Services (WAVES) www.wavespartnership.org System of Environmental and Economic Accounts (SEEA) poverty and millions more have seen their incomes rise. www.unstats.un.org/unsd/envaccounting/seea.asp There has been significant progress on life expectancy, literacy, and maternal and child health care rates. The Economics of Ecosystems and Biodiversity (TEEB) www.teebweb.org Yet we still need to meet the needs of the 2.6 billion UNDP-UNEP Poverty-Environment Initiative people without access to sanitation, the 1.3 billion www.unpei.org without access to electricity, the 1 billion who are hungry, and the 900 million people who lack safe, clean drinking International Institute for Environment and Development (IIED) water. We must do so in an era of increased uncertainty as www.iied.org we adapt to climate change. And we must do so without Globe sacrificing the environment. www.globeinternational.info We have learned that to make progress, equal attention Australian Bureau of Statistics must be given to the economic, environmental, and www.abs.gov.au social pillars of sustainable development. Inclusive green growth that takes into account the value of natural UK National Ecosystem Assessment capital is the pathway to sustainable development for all. www.uknea.unep-wcmc.org Now what’s needed is a global movement that makes natural capital accounting a reality. Acknowledgments This report was prepared by a team from the World Bank’s Sustainable Development Network led by Pawan G. Patil with Glenn-Marie Lange, Sonu Jain, Elisabeth Mealey, Urvashi Narain, Marian S. Delos Angeles, Hannah Behrendt, Esther Naikal, James Cantrell, and Grace Aguilar. The team gratefully acknowledges the peer review inputs of Dan Biller, Carter Brandon, Milan Brahmbhatt, Warren Evans, Marianne Fay, Kirk Hamilton, Jessica Andersson, Craig Hanson, and Pushpam Kumar and the support of the management team of Mary Barton-Dock and Sari Soderstrom. We would like to acknowledge the financial support to WAVES from the governments of France, Japan, Norway, and the United Kingdom. 40 This report demystifies natural capital accounting. Examples from developed and developing countries illustrate how natural capital accounts on forests, minerals, and water are helping countries make better economic decisions. There is a growing movement to reflect the true value of nature and its services in every country’s economic toolkit. Facilitated by the World Bank, Wealth Accounting and the Valuation of Ecosystem Services is a global partnership that aims to promote sustainable development by ensuring that the national accounts used to measure and plan for economic growth include the value of natural resources. WAVES The World Bank 1818 H Street, NW, Washington, DC 20433 USA www.wavespartnership.org