UK Natural Capital - Office for National Statistics

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May 2, 2014 - This paper is a first attempt by ONS to develop UK natural capital estimates ..... that feed into the “user cost of produced assets” calculation is.

02 May 2014

UK Natural Capital – Initial and Partial Monetary Estimates Author Name(s): Jawed Khan, Peter Greene and Adam Johnson; Office for National Statistics

Abstract This paper is a first attempt by the Office for National Statistics (ONS) to expand on existing approaches to estimate a monetary value for components of UK natural capital for the period of 2007 to 2011. ONS estimates that the monetary estimate of selected components of UK natural capital was £1,573 billion in 2011, 4.1% lower than in 2007. This is mainly due to a fall in the monetary value of UK sub-soil assets. It is important to emphasise that these numbers reflect attempts to estimate a limited segment of the UK’s total natural capital. However, they provide an illustration of some of the methodologies that ONS is employing to value these components and how their value may be evolving over time. The methodology to develop these estimates remains under development and the estimates reported should be considered experimental. Further work will be undertaken to develop and improve them.

Acknowledgements 1.

This paper has benefitted from the valuable comments from Kirk Hamilton (Grantham Research Institute on Climate Change and Environment, London School of Economics), colleagues from the Ecosystems Evidence team (Department of Environment, Food and Rural Affairs), Natural Capital Committee Secretariat and members of the Natural Capital Committee, and members of the Natural Capital Steering Group.

2.

We would also like to thank Catherine Healey (ONS) and John Chawner (ONS) for their valuable contributions.

1) Introduction In December 2012, the Office for National Statistics (ONS) published a roadmap, Accounting for the value of nature in the UK, which set out a strategy to incorporate natural capital into the UK Environmental Accounts by 2020. As part of the roadmap, ONS outlined a plan to develop natural capital estimates within the framework of comprehensive wealth accounts to provide an overview of the value of natural capital within the UK. In June 2013, ONS published a paper, Towards Wealth Accounting – Natural Capital within Comprehensive Wealth, to share its plans for developing UK natural capital estimates.

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This paper is a first attempt by ONS to develop UK natural capital estimates using wealth accounting approaches. Following further development, these estimates will be incorporated into the UK 1

Environmental Accounts - a 'satellite account ' to the main National Accounts. These estimates accord with the United Nations System of Environmental-Economic Accounting Central Framework and System of Environmental-Economic Accounting Experimental Ecosystem Accounting principles, which are in turn part of the wider framework of the System of National Accounts. There are many elements of natural capital that are not covered within this paper and therefore the estimates in this paper should not be interpreted as the total value of UK natural capital. Furthermore, the valuation approach adopted within the National Accounts framework may also be viewed as understating the contribution of natural capital to wider human welfare. Nevertheless, these estimates represent an important step forward because they start to paint a picture of non-commercial values that are not recorded explicitly in the standard national balance sheet. The methodology used to develop these estimates remains under development and the estimates 2

reported in this publication are experimental and should be interpreted in this context. ONS welcomes comments and feedback on all aspects of the methodology used and the assumptions presented in this paper, and seeks feedback for further improvement and refinement. The structure of this paper is as follows: it starts with a brief discussion on the purpose of the monetary natural capital accounts. It then provides a brief introduction to the concept of natural capital and provides an overview of UK natural capital estimates calculated by the World Bank and the Inclusive Wealth Report. The next section discusses the additional contributions made in this ONS paper to extend the scope of UK natural capital valued by these international studies. The following section discusses the overarching limitations and the assumptions made to develop these estimates. The next two sections discuss the methodology and the aggregate monetary estimates of components of UK natural capital respectively. The penultimate section provides a comparison with international studies and the final section discusses future work needed to improve these estimates. Notes 1.

Satellite accounts are extensions to the National Accounts that facilitate analysis of the wider impact of economic change.

2.

Experimental statistics are those statistics that are in the testing stage and are not fully developed. A full description of experimental statistics can be found here.

2) Purpose of monetary natural capital accounts Natural capital accounts offer a consistent way of looking at the significance of nature, beyond simply a compilation of disparate facts and figures. They can help identify drivers of ecosystem change within wider economy and society and they can help understand whether the UK’s stocks of natural capital are being used sustainably. By linking in to the National Accounts they can also provide comprehensive, integrated and consistent data sets, supporting the robust integration of economic and environmental information.

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The development of monetary accounts has a particularly important role to play in integrating environmental and economic information. Specifically, estimates of the value of natural capital assets can contribute to provide a more comprehensive picture of the nation’s balance sheet. Typically, this key indicator of long-term living standards has only included stocks of produced capital (e.g. buildings, machinery, infrastructure, etc.). In recent years several reports have highlighted the need to adopt a broader definition of wealth, including natural capital (for example, the Stiglitz Commission (2009), World Bank (2006, 2011), Inclusive Wealth Report (2012)) and to track the way in which different components of wealth change over time. The key intuition here is that some aggregate measure of wealth (and possibly some critical natural capital assets) needs to be preserved if growth and material well-being are to be sustainable. The valuation estimates in this paper therefore aim not only to raise awareness of the economic significance of natural capital, they also provide a basis on which changes in value of components of the UK’s natural assets (as they are augmented through investment) can be recorded. In time, this information could help develop an aggregate indicator of sustainability (as envisaged in the Office for National Statistics (ONS) June 2013 paper, Towards Wealth Accounting – Natural Capital within Comprehensive Wealth). It should be noted however that the kind of aggregate estimates presented here are only part of the picture as far as the ONS Natural Capital Accounting Roadmap is concerned. They are being developed alongside more detailed physical and monetary habitat and service-based accounts which can assess depletion or enhancement of ecosystems at more disaggregated levels and inform resource management decisions.

3) What is natural capital? Natural capital can be thought of as the stock of our physical natural resources and the ecosystem services that they provide. The Natural Capital Committee’s State of Natural Capital Report (2013) defines natural capital as: 'the elements of nature that directly or indirectly produce value to people, including ecosystems, species, freshwater, land minerals, the air and oceans, as well as natural processes and functions'. The above definition includes ecosystems, which are defined as a dynamic complex of plant, animal 1

and micro-organism communities, and their non-living environment interacting as a functional unit . The recent literature on ecosystem services, for example, Barbier (2011); Millennium Ecosystem Assessment (2005); National Ecosystem Assessment (2011); The Economics of Ecosystems and Biodiversity (2000), argues that ecosystems can be thought of as assets that produce a flow of beneficial goods and services to people over time. If properly managed, they yield a flow of vital ecosystem services, including the production of goods, life support processes and life fulfilling conditions. Ecosystem services are central in the ecosystem accounting framework since they provide the link between ecosystem assets on the one hand and the benefits received by society on the other. People benefit from both the materials that ecosystems provide (such as the harvesting of timber from woodland) and from the outcomes of natural processes (such as the benefits from clean air that has been filtered by an ecosystem).

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Ecosystem services that contribute to human well-being can be classified into: • • • •

Provisioning services – products such as: food (crops, meat and dairy products, fish and honey); water; fibre (timber and wool); and fuel Regulating services – benefits such as: water purification; climate regulation; noise and air pollution reduction and flood hazard reduction Cultural services - non-material benefits, for example: through cultural heritage; recreation or aesthetic experience Supporting services – such as biodiversity, soil function – these may not feature in the accounts to avoid double-counting, but information on these services will be needed in order to understand changes in the stock of ecosystem assets.

Therefore, natural capital comprises a wealth of components whose sum underpins not only all economic activity but life on earth itself. If properly managed, the living aspects of natural capital can continue to provide the ecosystem services and benefits indefinitely. Notes 1.

Source: Millennium Ecosystem Assessment (2005)

4) Previous work on valuing natural capital The value of the asset of natural capital can be calculated as the sum of all the natural capital and the ecosystem services that they provide over a particular time period or the life of the asset. There are broadly two approaches that have been used to-date to estimate the value of natural capital assets as part of efforts to measure changes in aggregate wealth. The first is the 'top-down' approach, which estimates the total wealth as the present value of future consumption and then breaks it down into the various different capital stocks – produced, natural and intangible capital. This is the World Bank approach adopted in 'Where is the Wealth of Nations?' (2006) and 'The Changing Wealth of Nations' (2011). The other is the 'bottom-up approach that adds up the individual capitals – produced, natural and human – to estimate the total wealth. 1

This was developed by Arrow et al, and was adopted in The 'Inclusive Wealth Report' (2012). The Office for National Statistics (ONS) paper, Towards Wealth Accounting – Natural Capital within Comprehensive Wealth, discussed these approaches in detail. 2

There are three major differences between these two approaches, other than the methodology , which have a bearing on the value estimates they generate: 1. 2. 3.

In the World Bank approach some elements of marketed natural capital are embedded in intangible capital, and as a result, the value of natural capital was underestimated. Different components of natural capital are included in their value estimation. The World Bank approach is more consistent with the System of National Accounts because it only looks at consumption; whereas, the definition of Arrow et al has a broader scope in terms of well-being.

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The value of UK natural capital was estimated by both of these reports as part of the comprehensive wealth estimates; however, there were some shortcomings due to the first two differences given above. Table 1 shows the elements that were included in the World Bank and Inclusive Wealth Report (IWR) calculations to estimate the value of UK natural capital. Table 1: Elements of natural capital in World Bank and Inclusive Wealth Report calculations to estimate United Kingdom natural capital World Bank (2006, 2011)

Inclusive Wealth Report (2012)

Agricultural land

Agricultural land

Timber

Timber

Non-timber forest resources

Non-timber forest resources

Protected areas

Oil and gas

Oil and gas

Coal

Coal Minerals (selected) Table notes: 1. Source: World Bank, Inclusive Wealth Report

Download table XLS format (25 Kb) World Bank Since the World Bank estimated comprehensive wealth accounts for 120 countries in 'The Changing Wealth of Nations' (2011), only those elements for which data were readily available for most of the countries were included. Hence the accounts omitted several elements of natural capital for the UK. However, as mentioned above, the value of some omitted assets that are reflected in market values were implicitly included in the total wealth and were part of UK intangible capital. Additional assets, such as water resources, were missing altogether. The World Bank did not attempt to adjust the estimates for the values of externalities, for example, damage from pollution. However, damage 3

from pollution was included in the World Bank genuine saving indicator which provides a broader indicator of sustainability by valuing changes in natural resources, environmental quality, and human capital, in addition to produced capital. The non-provisioning ecosystem services, cultural and regulating, were not valued in the World Bank estimates and were therefore omitted from the total wealth calculations. The value of ecosystem services would only be picked up in total wealth estimates if they contribute to the production of consumption goods. Most of the provisioning services (with the exception of fisheries and some water services) were included explicitly in the wealth accounts in the form of values for agricultural and forest land values that provide food, fibre, timber, non-timber forest products, etc.

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Protected areas were included in the World Bank’s UK natural capital calculations; however, the calculated value was modest mainly due to data limitations. The value was also underestimated because it did not include the value of other ecosystem services that protected areas may provide, such as tourism, because this would have been picked up in the total wealth. Inclusive Wealth Report Table 1 shows that in addition to assets such as fisheries and water, minerals were also missing from UK natural capital calculations estimated by IWR. Non-provisioning ecosystem services were also not included and neither were they embedded in total wealth estimates because unlike the World Bank, IWR computed the individual elements of wealth to derive total wealth. However, Edward Barbier progressed this discussion further in the IWR report by suggesting that ecosystems should be included as an important asset in an economy, and in principle, ecosystem services should be valued in a similar manner to any other form of wealth, regardless of whether a market exists or not.

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Notes 1.

The Inclusive Wealth Report, published in June 2012, is a joint collaboration between the United Nations University International Human Dimensions Programme and the United Nations Environment Programme.

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The World Bank used a Net Present Value approach; whereas, the IWR estimates are based on quantity * price. The unit resource price calculations were different as well.

3.

World Bank (2006, 2011)

4.

Chapter 8: Edward B. Barbier

5) The Office for National Statistics approach to valuing UK natural capital Both the World Bank (2006, 2011) and Inclusive Wealth Report (2012) have made important contributions to develop monetary estimates of the UK’s natural capital assets; however, they inevitably fell short of capturing all elements of natural capital as defined by the Natural Capital Committee’s (NCC) State of Capital Report (2013). The Office for National Statistics (ONS) intends to take the World Bank and Inclusive Wealth Report (IWR) work on UK natural capital estimates forward by addressing some of these shortcomings while recognising that not all elements defined by the NCC’s report - specifically the value of oceans and atmosphere - could be captured within the framework set by the System of National Accounts. As a first step, this paper develops monetary estimates by including all the components of natural capital listed in table 1 (section 4), except protected areas (see below), and adding additional components – minerals, fisheries and water - which were missing from the World Bank (2011) and IWR (2012) estimates. This paper has also gone one step further by including two non-provisioning ecosystem services - outdoor recreation and net greenhouse gas sequestration - in these estimates.

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The following components of natural capital are estimated to calculate the monetary value: Non-renewable assets •

Energy reserves - Oil and gas reserves



- Coal reserves Mineral reserves - Silver - Limestone - Chalk - Salt - Sand and gravel - Lead



- Peat – as an extractive resource Agricultural land

Renewable assets The following assets are categorised as renewable on the assumption that they can be harvested or extracted in a sustainable way: • • •

Timber Fisheries Water abstracted for public water supply

Natural capital assets providing non-provisioning ecosystem services The following ecosystem services are categorised as renewable ecosystem services on the assumption that there is no further depletion or degradation: • •

Outdoor recreation (a cultural ecosystem service) Net greenhouse gas sequestration (a regulating ecosystem service)

As shown in table 1, the World Bank included protected areas in its estimates. However, this paper has excluded them to avoid double counting. This is because some of the other assets in the list above, such as agricultural land, water, outdoor recreation and net greenhouse gas sequestration, already capture important aspects of protected area values. Furthermore, in the UK, protected areas do not generally preclude agriculture and other production.

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6) Limitations This paper is a first attempt by the Office for National Statistics (ONS) to estimate the monetary value of selected components of UK natural capital. The estimates presented need to be interpreted carefully and should not be considered as the definitive total value of UK natural capital due to three main limitations: a) Accounting context The estimates are developed in a wealth accounting context while being consistent with international accounting standards and guidelines. This approach uses the general balance sheet framework of the System of National Accounts (SNA) and extends the coverage to incorporate the value of those assets that are not considered economic assets in the SNA. Monetary valuation of natural capital in an accounting context focuses on economic value as expressed in real or hypothetical transactions. It can reflect the value of non-market goods or services provided that it is possible to construct a hypothetical transaction leading to a price for the goods and services in question. It does not include the contribution natural capital make to wider human welfare, nor is it seeking to capture the broader range of non-economic values that people may legitimately attach to the environment. These assets are valued using exchange values or market prices, which are described in the United 1

Nations System of Economic and Environmental Accounts (SEEA). Therefore, the elements of natural capital that cannot be valued by using market prices, or for which the market prices could not be observed or estimated, are excluded from this framework. SEEA is a satellite system of the SNA, meaning that accounts produced under this system bring environmental and economic information together within a common framework. A multi-year process of revision to the SEEA was completed by the United Nations Statistical Commission (UNSC). The revised SEEA consists of three parts: •

• •

The Central Framework of agreed concepts, definitions, classifications, accounting rules and tables which, following a period of global consultation, has been adopted as the international statistical standard for environmental-economic accounts by the UNSC in February 2012. Experimental Ecosystem Accounting, which following a global consultation has been endorsed by the UNSC as international guidance in February 2013. Extensions and Applications, which outlines applications of environmental economic accounting.

ONS’ aim is to develop monetary estimates for the UK’s natural capital in accordance with SEEA Central Framework and SEEA Experimental Ecosystem Accounting. In June 2013, ONS published the updated monetary estimates of UK Continental Shelf oil and gas reserves and the first monetary estimates of UK timber resources. Both UK Continental Shelf oil and gas reserves and UK timber resources were developed in accordance with the SEEA Central Framework and are fed into the monetary estimates for natural capital that are developed in this paper. This paper has estimated monetary values for the components of UK natural capital using a resource rent approach following SEEA Central Framework guidelines. The resource rent represents the annual value accruing to the natural asset after other economic returns from the use of the asset have been taken into account. There are some limitations to this method. For instance, if a non-

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renewable resource becomes scarcer, the price as well as the resource rent should, in theory, rise. However, if the cost of extraction increases by more than the price rises, the resource rent may fall, thereby indicating a decline in value (Conrad, 2010). b) Coverage Due to data and methodology limitations only a few elements and a few ecosystem services of natural capital are included in the monetary estimates derived in this paper. Some of the elements of natural capital that are included, for example water and non-provisioning ecosystem services, are partial values mainly due to lack of data. The most significant elements of natural capital missing from these monetary estimates are discussed below. Water Water resources provide a wide array of services from drinking water, agricultural irrigation and hydroelectric power to regulating and cultural services such as recreation. Only domestic and nondomestic water supply is valued in this paper; therefore, this is likely an underestimate. Ecosystem services As discussed in the opening sections, ecosystem services can be classified into four broad categories: provisioning, cultural, supporting and regulating services. Supporting services do not feature in the accounts to avoid double-counting as they support the functioning of all other services, but information on these services will be needed in order to understand changes in the stock of ecosystem assets. - Provisioning services Most of the provisioning services are included explicitly in these monetary estimates, either directly through the value of the amounts entering the UK economy or indirectly in the form of the value of agricultural land used to produce food and fibre etc. - Cultural services The UK natural environment is used by society for recreation, and this aspect of the value of natural capital is included in the estimates derived in this paper. However, there will be other significant benefits from the aesthetic enjoyment of the countryside which are not included in these values. People are willing to pay high prices for homes and, to some extent, for commercial properties in areas of great aesthetic beauty, such as coastal or woodland settings, or for the amenity benefits of 2

urban green space and of the climate. If the value of these ecosystem services were estimated and included in the monetary estimates of UK natural capital developed in this paper, the total calculated value would have been much higher. - Regulating services One regulating service, net greenhouse gases sequestration is included in these monetary estimates. Pollination and water filtration services are important regulating services and are already

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partially incorporated in the value of agricultural land. However, disentangling this and isolating the value would make it clearer how the different components of natural capital contribute to the economy. Other important ecosystem services, such as flood risk management (or hazard protection), air quality and noise protection, are also currently missing from these estimates due to data limitations. Protected Areas Much of the monetary value of terrestrial protected areas are already captured in other assets such as agricultural land, water, outdoor recreation and net greenhouse gas sequestration. Hence no attempt has been made to capture the value of protected areas separately in this paper, because of the likelihood of double-counting. For similar reasons, values of marine protected areas are also excluded from these estimates. There are also a number of other ecosystem services that are also not included in these estimates. ONS is currently working with the Department of Environment, Food and Rural Affairs to develop ecosystem accounts based on the National Ecosystem Assessment broad habitats as part of the roadmap, Accounting for the value of nature in the UK. These accounts are based on spatially disaggregated data and will provide important information on the values that are omitted from the natural capital estimates developed in this paper. c) Assumptions This paper presents monetary estimates for components of UK natural capital for 2011 using wealth accounting approaches and compares them with the year 2007 estimates. However, data for some of the components of natural capital varies in terms of availability and hence certain assumptions have been applied to back cast the data for missing years. For most components of natural capital presented here, data were available from 2007 and for some, such as minerals, data were available from 2002. For timber, the 2010 and 2011 monetary estimates developed by ONS in June 2013 have been used to back cast the value to 2007. Data for outdoor recreation are available only from 2009 and therefore this has also been back cast to 2007 using the average values for 2009-2011. This means that comparisons of 2011 values with those for earlier years should be treated with caution. Monetary valuation of natural capital assets through a Net Present Value (NPV) approach also requires a number of assumptions about the future state of those assets (including extraction pathways of non-renewable resources, management regimes for renewable resources and extent and condition of natural habitats) and of future scarcities. The resulting estimates are only valid in the absence of major departures from these assumptions. Due to data limitations and the complexities involved, a number of assumptions have been made in order to calculate resource rent for NPV, which are discussed in detail in the next section. Due to these assumptions there is the likelihood that certain components of natural capital are over or underestimated. For example, due to data limitations, the value of outdoor recreation from the UK natural environment might be overestimated because they are based on gross benefits without deducting the use of capital inputs; whereas, the value of water resources might be underestimated because only a proportion of the water abstracted has been valued in the estimates presented in this paper. The monetary value of sub-soil assets could be overestimated as well because the calculations do not take into account

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any liability for the greenhouse gas embedded in the reserves. The methodology to build these estimates is currently under development and therefore the numbers presented in this paper should be interpreted with care. Notes 1.

Source: SEEA Central Framework chapter 5

2.

Source: National Ecosystem Assessment , chapter 22

7) Building the natural capital estimates – Methodology Natural capital is a collection of assets and this paper has valued them using environmental asset valuation principles. Environmental assets provide a series of benefits to individuals and to society; therefore, not only should the current benefits be valued, the future stream of benefits over the asset life should also be valued. This section describes the methodology used to develop monetary estimates for components of UK natural capital. It discusses the broader approach to valuation and the overarching assumptions made. The next section presents the detailed methodology of how individual components of natural capital are valued. Valuation of natural capital In order to estimate the value of an environmental asset (natural capital) for national accounting purposes, ideally, observable market prices should be used. This could allow for a comparison with other assets in order to assess the relative economic importance of different forms of capital, understand the changes in national wealth and undertake similar types of analysis. Where market prices do not exist, an attempt should be made to estimate what the prices would be if regular markets did exist and the assets were to be traded on the date to which the asset valuation relates. The System of Economic and Environmental Accounts (SEEA) Central Framework states that an important principle in the valuation of environmental assets, as far as sub-soil assets are concerned, is to value the asset itself as it is in the ground rather than after its removal. For environmental assets which are extracted, the price of the output from extraction can normally be found in the market, but the market price of environmental assets in the ground is not common. Since environmental assets in the ground are often not traded in the market, an attempt should be made to estimate its value using the market prices that are observable. The Net Present Value (NPV) approach provides a widely accepted methodology for doing this, as it uses projections of the future rate of extraction of the asset, together with projections of its price, to generate a time series of expected future returns. These streams of expected returns are then discounted to estimate the value of an asset now rather than in the future. The NPV approach is recommended by SEEA and is used here to value the components of UK natural capital. Net Present Value (NPV)

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There are five main aspects of the NPV: 1. 2. 3. 4. 5.

Resource rent Pattern of expected resource rent Asset life Choice of discount rate Deflating – constant prices

1. Resource rent Once market-based asset values have been estimated it is important to isolate the benefits (or values) that are generated by the natural capital asset itself. The overall value of the service from a product typically includes a number of other elements, such as wages and returns to the investment made by investors that do not stem from the value of the natural capital. Once these costs and normal returns are deducted from the market price, the resulting element or net benefit is known as resource rent. The resource rent based approach is applied to value UK natural capital in this paper, as this provides an estimate of the value added stemming from natural capital itself – once all human inputs have been removed. However, in this paper outdoor recreation and net greenhouse gas sequestration have been valued as gross benefits due to lack of data on capital inputs. The steps involved in calculating the resource rent for each component of the natural capital estimated in this paper are given in table 2 below: Table 2: Derivation of resource rent Output Less

Operating costs Intermediate consumption Compensation of employees Other taxes on production PLUS other subsidies on production

Equals

Gross operating surplus – SNA basis

Less

Specific subsidies on extraction

Plus

Specific taxes on extraction

Equals

Gross operating surplus – resource rent derivation

Less

User costs of produced assets (consumption of fixed capital + return to produced assets)

Equals

Resource rent

Table notes: 1. Source: System of Environmental-Economic Accounting - Central Framework (SEEA-CF), page 141

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Download table XLS format (25.5 Kb) The data to calculate the resource rent for all the individual components are from the Office for National Statistics (ONS), except the data for the ten year government bond yield used to calculate “return on produced assets” which is from the Bank of England. This is a very low rate compared to those expected in certain markets, such as oil abstraction and water supply, and may well have the effect of overstating the resulting resource rent estimates. 1

The data on UK capital stocks that feed into the “user cost of produced assets” calculation is currently under review by ONS and, once the review is completed; more complete data may be available. Furthermore, capital stocks data are not available from 2009 onwards; therefore, the 2011 values are calculated based on the assumption that the past 5 year trend has continued. Furthermore, data on capital stocks are only available for sector classes (such as agriculture, fishing and forestry). In order to apportion these sector capital stocks to division level capital stocks, “Net Capital Expenditure” from the Annual Business Survey (2013) is used. This apportionment assumes that the share of capital stocks is proportional to its share of recent net capital expenditure. The above approach is then applied to calculate resource rents for each year and for each individual asset. However, due to data constraints, this paper has not applied this approach to calculate the resource rent for minerals and coal. Therefore, a general resource rent ratio is calculated for that sector (mining and quarrying) and applied to the calculated market values to isolate the resource rent from each component. A resource rent is calculated for the sector and divided by the total output of that sector to arrive at the used resource rent ratio. 2. Pattern of expected resource rent A critical factor in the valuation of natural capital is determining the expected pattern of the resource rent. These resource rent paths are not observed and hence assumptions concerning the flows must be made. A simplified way to determine the expected resource rent is to assume that the current flow is constant over the asset life, but this might not be the case. There may be cases where more information is available on future rates of extraction or prices. Where there is compelling evidence for this information, deviations should be made from the standard constant resource rent assumption. Another way to determine the expected extraction is to project the rate of future extraction and prices. Based on the projection the resource rent for each future year can be calculated. This method is preferable because it takes into account forecasted prices, costs and extraction rates. Due to data limitations, this paper follows the System of Economic and Environmental Accounts 2

(SEEA) Central Framework guideline and assumes actual and projected resource rents throughout the asset life, unless there is significant evidence that a more accurate path could be applied. The exceptions are for oil and gas reserves, peat, timber and net greenhouse gas sequestration for which further evidence is available.

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The pattern of expected resource rent is assumed to be constant based on the latest 5 years data. Equation to calculate future resource rents

The above equation shows how to calculate future resouce rents, by taking a five year average of actual data. Where: RR = resource rent t = year Up to 2011, actual data are used, where they are available, and after 2011 the calculated projection based on the previous 5 years is applied. 3. Asset life The asset life is the expected time over which the services from a natural resource can take place. It is important to estimate the asset life in the NPV model because it determines the expected time over which an asset should be discounted. The estimates of the value of natural capital presented in this paper assume a maximum asset life of 25 years for simplicity and comparability with international studies. However, deviations are made in estimating the asset life for oil and gas reserves, peat and timber resources, which are explained in the next section. The asset life of 25 years is an initial working assumption which may well understate the values given to these elements of natural capital and ONS will revisit this assumption as part of future work. 4. Choice of discount rate A discount rate is required to convert the expected stream of resource rents into a current period estimate of the overall value. A discount rate expresses a time preference - the preference for the owner of an asset to receive income now rather than in the future. It also reflects the owner’s attitude to risk. The use of discount rates in NPV calculations can be interpreted as an expected rate of return on the environmental assets. ONS presented a paper on Selecting discount rates for natural capital accounting in November 2013 at the Valuation for natural capital accounting seminar held in London. The paper suggested three options for choosing discount rates for natural capital and ecosystem accounting. Either social or market discount rates, depending on the purpose of the valuation, or a uniform discount rate as given in the HM Treasury Green Book for all assets regardless of the purpose of the exercise.

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Based on the discussions at the seminar, ONS decided to use the discount rate set out in the HM Treasury Green Book (2003, page 100). This paper has used a declining discount rate from the HM Treasury Green Book throughout the calculations to estimate the value of individual components of natural capital. 5. Deflating – constant prices The estimates presented in this paper are in 2011 prices. All prices and data used for the resource rent calculations are deflated using the GDP deflator to convert them into 2011 prices. Industry specific deflators are avoided as the individual price changes are of interest. This is due to an assumption that the price of a resource exhibits important information as to its relative value and its level of scarcity. However, there are some issues with using a GDP deflator. First, many resources exhibit a high level of speculation which could bias the price. Second, the general inflation level (from the GDP deflator) includes the price movements of the resources of interest, so some part of the relevant price changes will still be removed. Nevertheless, GDP deflators are good indicators of the absolute change in the value of money as opposed to industry specific deflators. Therefore, a general GDP deflator has been applied throughout due to an interest in the overall change in value – for both quantity and price changes. This is an area where further work will be needed. Notes 1.

Source: ONS (2010) Capital Stocks, Capital Consumption and Non-Financial Balance Sheets

2.

Source: SEEA Central Framework – Page 143

8) Application - Building the individual components This section provides the methodology for building individual components of natural capital selected in this paper. The following Net Present Value (NPV) formula is used to calculate the monetary asset value for each natural capital component: Net Present Value equation

The Net Present Value (NPV) equation is used to calculate the sum of discounted resource rents. Where: N = total number of periods (typically 25 years)

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t = year r = declining discount rate 1. Sub-soil assets The first component of natural capital in these monetary estimates is sub-soil assets, which consists of energy and mineral reserves. As mentioned in the introduction section, the following sub-soil assets are included in these estimates: •

Energy reserves - Oil and gas reserves



- Coal reserves Mineral reserves - Silver - Limestone - Chalk - Salt - Sand and gravel - Lead - Peat – as an extractive resource

For minerals and coal, actual data are used where available for the projection. The projection after 2012 is based on a 5 year average of production between the years 2008 and 2012 as illustrated below: Future extraction equation

Equation showing how to calculate future extraction, based on five year averages of actual data Where: S = extraction t = year This 5 year average is then applied throughout as the standard projection for each year after 2012. This assumption will be re-explored in the future, as some sub-soil assets are unlikely to witness a constant extraction path. For example, UK lead extraction dropped from 1,600 tonnes in 1997 to 300 tonnes in 2011.

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Price Production levels were frequently available for 2012, but prices could often only be sourced up to 2011. The World Bank approach (2011) of using export data to calculate a resource price is applied for minerals and coal. Forecasted prices are assumed constant based on a 5 year average, typically between 2007 and 2011. Future price per unit equation

Equation showing how to calculate future prices per unit, based on five year averages of actual data Where: P = price per unit of resource t = year The actual and projected data for production and price are then used to calculate a market value for minerals and coal. The 'mining and quarrying' resource rent ratio was then applied to isolate the value accruing from the resource itself. Energy reserves Oil and gas reserves The estimates of UK Continental Shelf oil and gas reserves are based on the methodology published by the Office for National Statistics (ONS) in June 2013. The methodology relied on an Office for Budget Responsibility forecast of oil and gas production and prices, and the incomes and expenditures derived from these. As such it did not assume a constant extraction path and, therefore, the asset life was not 25 years as considered for other components of natural capital in this paper. The asset lives were calculated as years to depletion of reserves based on projected extraction. The asset life used for UK Continental Shelf oil and gas reserves at 31 December 2011 was 18 years. Monetary valuation of UK Continental Shelf oil and gas reserves The NPV approach adopted has the following assumptions: •



The valuation was based on proven and probable reserves. Proven reserves are those which have a 90% chance of greater of extraction in the future, and probable reserves have a better than 50% chance. Possible reserves, those with 50% or less chance of extraction, were not valued as part of this calculation; Proven and probable reserves are always extracted first;

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The monetary valuation of UK Continental Shelf oil and gas reserves at the end of 2007 and 2011 is estimated to be £186 billion and £120 billion in 2011 prices, respectively. Coal reserves Data for coal production are taken from the British Geological Survey (BGS), which lists extraction of Bituminous and Anthracite coal types. These data are then used to forecast future extraction for 25 years as reserves are unlikely to be fully depleted in this time frame: data from the Coal Authority suggests reserves are likely to last far beyond this point. The price data for coal are taken from the BGS from 2007 to 2011 and prior to 2007 price data are from HM Revenue & Customs. The data are based on export values and volumes. Using the extraction and export price data a flow value is calculated. The 'mining and quarrying' resource rent ratio is then applied to this asset value to isolate the value accruing from the natural capital itself. The derived flow value is then assumed constant for 25 years and discounted to provide a capitalised value of the asset value of coal. Monetary valuation of UK coal reserves By applying the NPV under the above assumptions, the monetary valuation of UK coal reserves at the end of 2007 and 2011 is estimated to be £14.4 billion and £14.6 billion in 2011 prices, respectively. Analysis The UK Continental Shelf oil and gas reserves are the UK’s most valuable subsoil assets, worth £120 billion in 2011. The value of UK Continental Shelf oil and gas reserves has declined by 35.4% since 2007, mainly due to a fall in the level of proven and probable reserves. However, the monetary value for UK coal reserves increased slightly between 2007 and 2011. This is likely due to an increase in coal prices during this period which offset a fall in production. Figure 1 shows the monetary value of both oil and gas and coal reserves for 2007 and 2011.

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Figure 1: Monetary value of energy reserves, 2007 and 2011 (2011 prices) United Kingdom

Source: Office for National Statistics Download chart XLS format (25 Kb) Minerals This category encompasses a number of different minerals: lead, silver, peat, salt, sand and gravel, limestone and chalk. The data on extraction for all minerals are taken from the BGS. The data on prices from 2007 to 2011 are from the BGS and data from 2002 to 2007 article taken from HM Revenue and Customs export values. Unit values for each resource are derived by dividing total export volume by total export value, which is then assumed as an estimated unit price for the respective resource. This is an area where the estimates could be improved, as export prices may not be representative of domestic extraction. Constant extraction based on five year average prices (as explained in the previous section) is assumed. Total reserves data allow estimating the asset life of the minerals; however, due to a lack of data on total reserves, a 25 years asset life has been assumed for all minerals.

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Peat areas are now under various and increasing forms of legal protection or designation. Furthermore, the National Planning Policy Framework states that no new planning permissions for peat extraction shall be granted. As a result, extraction of peat is likely to continue to decrease. Therefore, instead of taking a five year production average, this paper has estimated future production of peat with an exponential function based on trends in previous production data. This function estimates peat production to fall continuously at a diminishing rate over the 25 year asset life. Monetary valuation of UK mineral reserves By applying the NPV under the following assumptions: • • • •

Constant extraction rate for 25 years for all minerals except peat; Declining extraction rate for peat; Export prices are a proxy for the resource price and held constant; A general 'mining and quarrying' resource rent ratio;

The monetary valuation of UK mineral reserves at the end of 2007 and 2011 is estimated to be £14.4 billion and £14.0 billion in 2011 prices, respectively. Analysis Figure 2 below compares the value of minerals in 2007 with 2011. Silver, lead and peat are grouped together because of their small value. Silver has the lowest value of all the minerals, and is estimated to be worth £0.4 million in 2011. The low value is because only a small amount of silver is produced in the UK, although a larger amount is often recycled. Lead is also of low value in 2011 at £2.0 million because production is low and likely to remain relatively flat, having decreased steadily from 1600 tonnes in 1997 to 300 tonnes in 2011. The value of peat in 2011 is 55% of its 2002 level. Peat production has fallen steadily and continues to diminish. This is because environmental concerns over peat extraction mean that no new planning permissions for peat shall be granted. It should be noted that this value of peat is purely from the perspective of an extracted resource (and its primary use as compost). Peat is an important carbon store and its actual ecosystem value would be far in excess of the extractive value presented in this paper. Figure 2 illustrates the variance in the value of different minerals in the UK, with limestone having the highest value, worth £5.5 billion in 2011. Although limestone has a low value per tonne, extraction of this mineral is the highest of all the minerals, with 58 million tonnes produced in 2011.

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Figure 2: Monetary value of mineral reserves, 2007 and 2011 (2011 prices) United Kingdom

Source: Office for National Statistics Download chart XLS format (17.5 Kb) Summing up Figure 3 shows a long term trend of UK sub-soil assets. The figure shows that since 2002 the overall asset value of UK sub-soil assets has decreased substantially. Among these sub-soil assets, five assets - lead, peat, limestone, chalk and oil and gas reserves - have decreased in monetary value since 2002. The majority of this fall reflects depleting reserves. The value of UK sub-soil assets in 2011 was £149 billion, a decrease of 40.7% since 2002. This was mainly due to a 45.7% fall in the monetary value of UK Continental Shelf oil and gas reserves. There was a general decline in reserves of oil and gas, from 1,953 million tonnes of oil equivalent (mtoe) in 2002 to 1,328 mtoe in 2011. Oil and gas production has also declined from 223.5 mtoe in 2002 to 97.4 mtoe in 2011.

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Between 2010 and 2011, the estimated value of UK Continental Shelf oil and gas reserves fell by £11 billion; however the proven and probable physical reserves increased by 15 mtoe. The fall in monetary value was due to a downward revaluation of £13 billion combined with a fall of £9 billion due to extraction of reserves, partly offset by an increase of £11 billion in the value of other volume changes. A more detailed analysis can be found in the ONS paper, Monetary valuation of UK Continental Shelf oil and gas reserves, published in June 2013. Figure 3: Monetary value of subsoil assets, 2002 to 2011 (2011 prices) United Kingdom

Source: Office for National Statistics Download chart XLS format (19 Kb) 2. Agricultural land, timber and fisheries The second category in these estimates is grouped together as agricultural land, timber and fisheries. Agricultural land

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This class uses the actual resource rent approach as set out in section 7. The calculated resource rent is then assumed constant from 2011, prior to 2011 actual data are used, and is then capitalised appropriately to derive the asset value. There are expected to be only minor changes in the stock and productivity of agricultural land over this period. The industrial classification, division 'crop and animal production, hunting and related service activities' is used due to data constraints. An added complication in this sector, which has been ignored at present, is the presence of owner-occupier farms whose 'wages' would not necessarily be recorded under compensation of employees. So, the resource rent applied here may be overestimated as it has not taken these notional 'wages' (essentially paid out of the profit of the farm) out of the calculation. Further work in this area will need to take into account changes in the diversity and productivity of the farming sector. Monetary valuation of UK agricultural land By applying the NPV under the following assumptions: • • • •

Actual and projected resource rent applied for 25 years; The gross operating surplus figure includes all wage costs; Hunting and related agricultural services are negligible; The share of the net capital stock of the sector is proportional to its share of recent net capital expenditure;

The monetary valuation of UK agricultural land in 2007 and 2011 is estimated to be £44.9 billion and £45.1 billion in 2011 prices, respectively. Timber The estimates of UK timber resources are based on the methodology published by ONS in June 2013. The methodology on timber valuation assumes that every tree is felled for timber when it reaches an age of 50 years, hence there are differing asset lives based on standing timber stock age and the time till maturity (50 years). Monetary valuation of UK timber resources By applying the NPV under the following assumptions: • • •

The net return or resource rent is received when the timber is harvested. The harvesting age is 50 years and all timber is available for wood supply; As the timber grows until it is harvested, the expected volume of standing timber for each age class is fixed at harvesting age; The values for 2007-2009 (inclusive) have been back cast based on a simple trend line from 2010 and 2011;

The monetary valuation of UK timber resources in 2007 and 2011 is estimated to be £6.1 billion and £6.9 billion in 2011 prices, respectively.

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The 2007 estimates for timber should be treated with caution, as they are based on a two point 1

estimate in 2010 and 2011 and then back cast to 2007. However, it is likely that the asset value of timber would have increased over this period due to increasing timber prices and production (Forestry Statistics, 2013). Fisheries The established resource rent approach is applied for the 'Fishing and Aquaculture' Standard Industrial Classification (SIC) division. By following the standard assumptions, negative resource rents are derived for each year of the account, which means that the NPV of the fisheries resource is calculated to be zero. This is clearly not a realistic valuation although it is similar to findings reported in the Physical and Economic Accounts for UK Fisheries (ONS, 2003). The negative resource rents can be attributed to a range of factors such as overcapacity in the fishing fleets, the existence of fisheries subsidies and the competitive nature of the market. Future work will be needed in this area to explore the data and methodological issues involved and how best to address them so that more realistic valuations can be incorporated into the accounts. Monetary valuation of UK fisheries By applying the NPV under the following assumptions: • • •

Actual and projected resource rent applied for 25 years; The share of the net capital stock of the sector is proportional to its share of recent net capital expenditure; The gross operating surplus figure includes all wage costs;

No monetary value is calculated for fisheries in either 2007 or 2011. Further work is planned to address the data and methodological issues raised by this result. Figure 4 below shows the monetary value of agricultural land and timber in 2011. The figure highlights that the calculated asset value for agricultural land is 6.5 times higher that of timber in 2011.

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Figure 4: Monetary value of agricultural land and timber, 2011 United Kingdom

Source: Office for National Statistics Download chart XLS format (17 Kb) 3. Water abstracted for public water supply The third category in these estimates is public water supply. The data for water are taken from the 2

Office for National Statistics. This water category is based on actual resource rents calculated for the industrial classification division of 'water collection, treatment and supply'. The definition given by Standard Industrial Classification 2007 for this division is: 'the collection, treatment and distribution of water for domestic and industrial needs. Collection of water from various sources, as well as distribution by various means is included' (ONS, 2009). A complication is that the calculated resource rent is not purely related to water supply, but also the process of treating the water. It is assumed that the industry division used is an appropriate proxy for calculating the value accruing from water (as a component of natural capital) used for public water supply.

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The figures presented in this paper are for public water supply which only accounts for around a quarter of water abstraction. Therefore, the value for water presented is likely an underestimate. The calculated resource rent is then assumed constant for 25 years based on actual data, where available, and a projection based on the average 2007-2011 resource rent and capitalised appropriately to arrive at the asset value. Monetary valuation of water abstracted for public water supply By applying the NPV under the following assumptions: • • • • •

Actual and projected resource rents are applied over the 25 year asset life; The share of net capital stock of the sector is proportional to its share of recent net capital expenditure; In a regulated market, the prices set by the regulator include a realistic allowance for resource rent; Water companies receive a return on capital at the level of the 10-year Government Bond rate; Any environmental costs incorporated in the charge for abstraction licences paid to the Environment Agencies are not included as part of the resource rent;

The monetary value of UK public water supply in 2007 and 2011 is estimated to be £11.4 billion and £11.3 billion in 2011 prices, respectively. 4. Outdoor Recreation (a cultural ecosystem service) The next category in these monetary estimates is outdoor recreation. This is one of the most important cultural ecosystem services provided by the natural environment. People visit the natural environment, for example woodlands, for walking and other recreation related activities and receive numerous non-material benefits. Since the recreational benefits of natural areas cannot be enjoyed without travelling to the site, a lower bound price for outdoor recreation can be imputed. In turn, an asset value for the recreational sites can be estimated. Travel cost methods are often used to value ecosystem services associated with recreational sites. These methods estimate the value of the recreational ecosystem service based on the amount consumers may be willing to pay as reflected in the costs of visiting a recreational site, for example transport costs, travel time and visiting time. This is based on the understanding that to enjoy the recreational site one has to pay the travel costs of getting to that site and there is an opportunity cost to their time. From this, the demand for a recreational site can be determined based on the cost of visiting and the number of visits. To obtain an estimate of the value of recreation that stems from the natural environment in the UK, this paper has used a simple travel cost method. This paper has estimated the following two components of travel cost – private transport fuel costs and visiting time – as a proxy to estimate part of the value of the sites that provide outdoor recreation. Due to data limitations, other costs, such as parking, public transport expenditure and travel time are not included in these calculations. This is an area of further research.

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We have assumed that there is a price to visit the recreational sites and the price is the travel cost and the visit time. At this price, the quantity demanded is the actual number of visits to the site. It is also assumed that all visitors have the same average willingness to pay and would pay this price. This method is based on the assumption that there could be some mechanism whereby visitors might be charged their average willingness to pay if a market did exist. This is based on SEEA Central Framework and SEEA Experimental Ecosystem Accounting principles that when there are no observable prices because the items in question have not been purchased or sold on the market in the recent past, an attempt has to be made to estimate what the prices would be if a regular market existed and the assets were to be traded on the date to which the estimate of the asset relates.

3

Data on the number of people visiting recreational sites from 2009 to 2011 are taken from Monitoring Engagement with the Natural Environment (MENE) survey. This survey is conducted by Natural England on an annual basis. The natural environment is defined as the “green open spaces in and around towns and cities, as well as the wider countryside and coastline” (Natural England, 2012). The proportion of visits to the countryside in 2011/12 was 52%, compared with 38% and 10% to greens places within urban areas and coastal locations respectively. To calculate the travel cost for 2009 to 2011, data on expenditures on petrol and diesel are from the MENE survey. To calculate the value of visiting time, the average duration of a visit in 2009 to 2011 is multiplied by 75% of the average hourly wage rate (Fezzi et al, 2014). This ratio arises because there is not a perfect relationship between how much time is spent visiting the natural environment and choosing to work and earning an hourly wage. The selected ratio could overestimate the numbers because some of the visitors might be non-working people, such as retirees, and this is an area of future research. Data for the average wage rate are taken from ONS Annual Survey of Hours and Earnings. As the visitor data relates to England only, they are scaled up to the UK level using population alone. This is required as there are not comparable data available for England, Wales, Northern Ireland and Scotland. Hence, England data are used as it would have the largest weighting and the required data for this exercise are available. Private transport fuel costs and the value of visiting time are added together as the yearly flow of benefits from the outdoor recreation provided by natural capital. Due to lack of data on capital inputs, gross benefits are calculated and therefore no resource rent ratio is applied. However, it is recognised that there are a number of costs related to outdoor recreation that should be deducted, for instance the roads and car parks which allow visits to take place. Actual and projected flows are used over 25 years and discounted appropriately using the HM Treasury declining discount rates. The MENE survey began in 2009 and therefore the data for annual visits and travel expenditures are not available for 2007 and 2008. To estimate the values for 2007 and 2008, average values for 2009 to 2011 are used. The yearly flow estimates are then inflated from current prices to 2011 prices. It is recognised that the above method might be capturing some elements of producer or consumer surplus. This is an area of future work as ONS intends to develop monetary ecosystem accounts that are consistent with the System of Economic and Environmental Accounts (SEEA) Experimental Ecosystem Accounting guidelines. As part of the ONS Roadmap, Accounting for the value of nature in the UK, more detailed modelling work will be explored to address these issues. Monetary valuation of outdoor recreation ecosystem services

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By applying the NPV under the following assumptions: • • • •

There could be some mechanism whereby visitors might be charged their average willingness to pay if a market did exist; Visitors incur this expenditure for the sole intention of enjoying the outdoor recreation provided by the natural environment (rather than primarily to visit friends or enjoy a good meal); 75% of the average hourly wage rate represents a good estimate of the opportunity cost of time; Actual and projected gross benefits for 25 years;

The monetary asset value of recreational ecosystem services provided by UK natural capital in both 2007 and 2011 is estimated to be £1,356 billion and £1,353 billion in 2011 prices, respectively. Whereas, the value of annual benefits decreased from £83.9 billion in 2007 to £77.4 billion in 2011, in 2011 prices. 5. Net greenhouse gas sequestration (a regulating ecosystem service) The final category in these estimates is net greenhouse gas sequestration. This refers to the net annual change in the stock of greenhouse gas (GHG) in the “Land Use, Land Use Change and Forestry” (LULUCF) sector. In essence, it shows how much GHG has been taken out of the atmosphere by terrestrial ecosystems in a particular year. GHG storage (i.e. carbon currently locked away in ecosystems in various forms) has not been considered in our calculations. This paper has considered six GHG - carbon dioxide, methane, nitrous oxide, hydro-fluorocarbons, per-fluorocarbons, and sulphur hexafluoride. The data on net GHG sequestration are taken from the Department for Energy and Climate Change (DECC) LULUCF publication. Data on the market price of carbon are not available and therefore this paper has taken the social cost of carbon as a proxy of the market price. The data on the social cost of carbon have been taken from the DECC “Carbon Valuation in UK Policy Appraisal: A revised Approach” publication. Due to a lack of data on all GHG sequestration, the data on cost of carbon have been used to value all terrestrial physical net GHG sequestration. Due to data limitations, net GHG sequestrations are calculated as a “gross benefit” and a 100% resource rent ratio is assumed in this case. The estimation of future GHG sequestration is constant and based on the average sequestration from 2008 - 2012, and is applied over the 25 year asset life. Monetary valuation of net GHG sequestration ecosystem services By applying the NPV under the following assumptions: • • •

Market price is the same as the social price of carbon; No capital inputs have been deducted; Actual and projected physical GHG sequestration applied for 25 years;

The monetary valuation of net GHG sequestration services provided by UK natural capital in 2007 and 2011 is estimated to be £7.4 billion and £8.0 billion in 2011 prices respectively. Analysis

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Figure 5 shows the value of UK net GHG sequestration ecosystem services. The increase in value is due to the increase in the social cost of carbon over this period and the amount sequestered. In 2011, the overall net GHG sequestration of the LULUCF sector was 7.5 million tonnes of carbon dioxide equivalent. This is the overall sequestration terrestrial ecosystems and is comprised of 21 different components. For example, “forest land remaining forest land” sequestrated 15.6 million tonnes of carbon dioxide equivalent in 2011, whilst wetland, primarily consisting of peat lands, emitted 0.4 million tonnes of carbon dioxide. Further detail is available from DECC (2014). Figure 5: Value of net greenhouse gas (GHG) sequestration services, 2007 to 2011 (2011 prices) United Kingdom

Source: Office for National Statistics Download chart XLS format (25 Kb)

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Notes 1.

Timber data are taken from Forestry Statistics. The data for year 2011 corresponds to accounting period 1st April 2011 to 31st March 2012. The same applies to data for other years.

2.

Source: United Kingdom National Accounts - The Blue Book, 2013

3.

Source: SEEA Central Framework – page 139

9) Aggregate monetary estimates of components of UK natural capital By applying the Net Present Value to the following components: • • • • • • •

Sub-soil Assets Agricultural land Timber Fisheries Water abstracted for public water supply Outdoor recreation (a cultural ecosystem service) Net greenhouse gas sequestration (a regulating ecosystem service)

The aggregate monetary value of these components of UK natural capital is estimated to be £1,573 billion in 2011; 4.1% lower than in 2007. Figure 6 shows the aggregate monetary estimates of components of UK natural capital. The calculated monetary estimates of components of UK natural capital have declined every year since 2007. This is mainly due to a fall in the value of sub-soil assets.

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Figure 6: Aggregate monetary estimates of components of natural capital, 2007 to 2011 (2011 prices) United Kingdom

Source: Office for National Statistics Notes: 1. Includes mineral reserves, energy reserves, net greenhouse gas sequestration, outdoor recreation, agricultural land and timber, and water abstracted for public water supply.

Download chart XLS format (25.5 Kb)

10) Comparison with international studies As discussed in the earlier section, The World Bank (2011) and the Inclusive Wealth Report (2012) have published monetary estimates for UK natural capital in their respective publications. Table 3 provides a comparison of these monetary estimates with the estimates derived in this paper:

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Table 3: Comparison of World Bank, Inclusive Wealth Report (IWR) and Office for National Statistics (ONS) monetary estimates of natural capital Latest Estimate (year valued in brackets)

World Bank

IWR

ONS - without recreational and GHG sequestration services

ONS - with recreational and GHG sequestration services

Total Natural Capital, £bn

265 (2005)

85 (2008)

212 (2011)

1,573 (2011)

Components of natural capital estimated

Agricultural land

Agricultural land

Agricultural land

Agricultural land

Timber

Timber

Timber

Timber

Oil and gas

Oil and gas

Oil and gas

Oil and gas

Coal

Coal

Coal

Coal

Non-timber forest resources

Non-timber forest resources

Water supply

Water supply

Minerals (selected)

Fisheries

Minerals (Silver, lime stone, chalk, salt, sand and gravel, peat and lead)

Minerals (Silver, lime stone, chalk, salt, sand and gravel, peat and lead)

Protected areas

Outdoor recreation Net greenhouse gas sequestration

Table notes: 1. The World Bank and IWR values were given in USD prices and have been deflated using the US GDP implicit price deflator up to the ONS estimate base year (2011). They were then exchanged into Pound Sterling using the 2011 average exchange rate taken from the Bank of England. 2. Source: World Bank, Inclusive Wealth Report, Office for National Statistics

Download table XLS format (26.5 Kb)

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This paper has developed UK natural capital monetary estimates by including all the components of natural capital, excluding protected areas, calculated by the World Bank and Inclusive Wealth Report (IWR). This paper has also included two non-provisioning ecosystem services – outdoor recreation and net greenhouse gas sequestration - in these estimates. The methodology used in this paper estimates the aggregate monetary value of the selected components of UK natural capital at £1,573 billion. These estimates are much higher than the estimates developed by the World Bank and IWR for the UK’s natural capital. This is largely due to the high asset value of outdoor recreation ecosystem service as shown in figure 7 below. Figure 7: Monetary value of individual components of natural capital, 2011 United Kingdom

Source: Office for National Statistics Notes: 1. Water represents water abstracted for public supply

Download chart XLS format (25 Kb)

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The aggregate monetary estimates of the components of UK natural capital in this paper, without outdoor recreation ecosystem service and net GHG sequestration, are £212 billion in 2011. This is close to the monetary value estimated by the World Bank (2011) for UK natural capital (table 3). This is mainly due to the World Bank’s methodology being similar to the methodology used in this paper. On the other hand, the monetary value of UK natural capital estimated by the Inclusive Wealth Report is relatively low. This could be because the assets were valued at current market price without valuing the future stream of benefits.

11) Future work This paper is a first attempt by the Office for National Statistics (ONS) to develop UK natural capital estimates using wealth accounting approaches. There are a number of challenges and issues that need to be addressed in improving these estimates over time. These estimates are developed as part of the roadmap Accounting for the value of nature in the UK, which set out a strategy to incorporate natural capital into the UK Environmental Accounts by 2020. As such, these estimates will be expanded and improved before they are fully incorporated into the UK Environmental Accounts. As discussed in section 6, not all the components of natural capital are included in these estimates due to data and methodological limitations. Even those components that are selected have data gaps and limitations. There are two main areas for future work: • •

Explore alternative data sources and methods to improve the estimates of the components of natural capital that are included in this paper. Explore the inclusion of other components of natural capital, especially ecosystem services, as discussed in section 6 into the monetary estimates.

In addition, as discussed in the earlier sections, ONS will refine the methodology and address the data gaps to improve the monetary estimates for fisheries, water, agricultural land and outdoor recreation. A number of other non-material benefits that nature provides, such as positive health impacts, are not considered in these estimates because of their welfare aspects. However, these are potentially substantial components of the benefits arising from natural capital and therefore their inclusion in the natural capital accounts needs to be investigated. ONS is currently working with the Department of Environment, Food and Rural Affairs to develop ecosystem accounts based on National Ecosystem Assessment broad habitats as part of the roadmap. These accounts are based on spatially disaggregated data and will provide important information on the values that are omitted from the natural capital accounts developed in this paper. This paper focuses on the benefits provided by natural capital. An equally important part for policy making purposes is understanding maintenance and restoration costs for natural assets. Such information will provide a different yet complementary picture on how the value of natural assets is changing over time. This is currently not explicitly part of the roadmap initiative but is being actively considered in planning future work.

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Background notes 1.

Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: [email protected]

Copyright © Crown copyright 2014 You may use or re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government-licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected] This document is also available on our website at www.ons.gov.uk.

References 1.

Barbier, E.B. (2011) Capitalizing on Nature: Ecosystem as Natural Assets. Cambridge: Cambridge University Press British Geological Survey (2012) United Kingdom Minerals Yearbook 2012 Conrad, J. M. (2010) Resource Economics: Second Edition, Cambridge: Cambridge University Press Department of Energy and Climate Change (2014) Official Statistics: Final UK Greenhouse Gas Emissions Department of Environment, Food and Rural Affairs (2013) Water Abstraction Tables Fezzi, C., Bateman, I. J. and Ferrini, S. (2014) Estimating the Value of Travel to Recreational Sites Using Revealed Preferences, FEEM Working Paper No. 64 HM Treasury (2003) The Green Book: Appraisal and Evaluation in Central Government, London: TSO Khan, J (2013), Towards Wealth Accounting – Natural Capital within Comprehensive Wealth (457.6 Kb Pdf) Khan, J; Greene, P (2013), Selecting Discount rate for Natural Capital Accounting, Office for National Statistics Khan, J; Greene, P; Hoo, KW (2013), Monetary valuation of UK Continental Shelf Oil and Gas Reserves (256.3 Kb Pdf), Office for National Statistics

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Khan, J; Greene, P; Hoo, KW (2013), Monetary valuation of UK timber resources (226.6 Kb Pdf), Office for National Statistics Millennium Ecosystem Assessment (2005) “Millennium Ecosystem Assessment”, United Nations Natural Capital Committee (2013) “State of Natural Capital Report” Natural England (2012) Monitor of Engagement with the Natural Environment ONS (2003) “The Physical and Economic Account for UK Fisheries” ONS (2010) “Capital Stocks, Capital Consumption and Non-Financial Balance Sheets” ONS (2012) “Accounting for the Value of Nature in the UK: A Roadmap for the development of Natural Capital Accounts within the UK Environmental Accounts” ONS (2012) Annual Business Survey, 2012 Provisional Results ONS (2013) “United Kingdom National Accounts, The Blue Book, 2013 Edition” Stiglitz et al. (2009) Report by the Commission on the Measurement of Economic Performance and Social Progress United Nations (2013) System of Environmental-Economic Accounting: Central Framework United Nations (2013) System of Environmental-Economic Accounting: Experimental Ecosystem Accounting Volume 2 UK National Ecosystem Assessment (2011) UK National Ecosystem Assessment United Nations Environment Program and United Nations University (2012) Inclusive Wealth Report World Bank (2006) Where is the Wealth of Nations? World Bank (2011) The Changing Wealth of Nations

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