How we track our economy influences everything from government spending and taxes to home lending and business investment. In our series The Way We Measure, we’re taking a close look at economic indicators to better understand what’s going on.
The way traditional economics measures the environment, or in many instances doesn’t, is a long standing problem. For decades, our primary measure of economic activity, gross domestic product (GDP) has measured “progress” without accounting for the cost borne by the environment, nor the substantial benefits we receive from it.
In politics and economics we regularly use the word “capital” to mean assets like buildings or cash. This should extend to the environment too. Nature is an asset.
The need to recognise our natural capital is highlighted by its ongoing loss – the reductions in forests, the depletion of fish stocks, the degradation of soil, the loss of biodiversity, more severe flooding and similar trends. The human and environmental cost of these losses are invisible if you only look at GDP, and so there is little political incentive to do anything.
We must change this, and make nature integral in our calculations and decision making. Our economic system functions within, not alongside, an environmental reality. The tools have been created over the past twenty years to factor the environment into our decision making. We just need to take the next step.
Measuring natural capital
For over 20 years experts around the world have been developing extended economic accounts to include nature. They build upon the United Nations (UN) economic accounting framework called the System of National Accounts (SNA). In 2012, the UN Statistical Commission adopted the System of Environmental-Economic Accounting (SEEA) as the international statistical standard for the integration of environmental data within the SNA, including new standards for the measurement of GDP adjusted for the depletion of natural resources such as timber, fish, water and mineral resources.
Progress in the implementation of the standard is ramping up, with at least 70 countries having or planning SEEA based measurement programs. Legislation has been passed for EU countries that must now produce accounts annually in six areas of the SEEA. The World Bank is leading a global partnership, WAVES, to drive forward accounting for natural capital in developing countries. It uses the SEEA as the technical basis for its work.
Australia has been at the leading edge of these developments and the Australian Bureau of Statistics (ABS) has a small but well established program for environmental accounting. There are accounts for flows of water and energy on an annual basis, and annual measures of the stocks and values of land and various natural resources. These, and other environmental-economic accounts, are all brought together in the annual report, Australian Environmental-Economic Accounts.
At a corporate level, there is also interest in extended accounting. A substantive step forward was the release of the Natural Capital Protocol in July 2016 by the Natural Capital Committee involving contributions from a wide range of stakeholders. The corporate focus has mostly been on accounting for carbon emissions and water use, but extensions into other areas are well underway.
But these advances have not been enough. Getting traction and buy-in with decision makers remains challenging and the level of investment needed to ensure more frequent reporting has not been forthcoming.
Integrating economic measures
Although accounting for environmental stocks and flows is useful and should be encouraged, none of the accounts on their own drive home the link between economic activity and the environment. Without a broader, more systemic framing, it remains easy to see the environment as a set of separable components, which are external to the economy.
This siloed view is reinforced in our approaches to environmental measurement. Experts in soil, water, biodiversity and the climate all establish their particular approaches, without consideration for how their data can be used and applied in an integrated way.
To create this more holistic view, SEEA has recently been extended to account for ecosystems and biodiversity. The resulting accounting framework melds human production and consumption with the benefits provided by environmental ecosystems. These include the provision of timber, fish and water, the filtration of air and water, carbon sequestration and cultural and amenity services. Sustaining this requires maintaining our natural capital.
Ecosystem accounting thus gives a platform for a full integration of nature with standard economic data on production, income and wealth.
This advance has allowed for more engagement with experts in other fields – economics, statistics, ecological and biophysical sciences, geography and accounting. Together, the experts involved have worked to create a common understanding and language for the considerable depth of knowledge that exists in each “silo”. Ecosystem accounting projects can now been found all over the world at national and local scales. They are taking place in many developed countries but examples are also present in less statistically advanced countries such as the Philippines, Peru, Uganda and Mexico.
In Australia, the ABS is developing ecosystem accounts for the Great Barrier Reef and the SEEA EEA framework has been applied extensively in Victoria in various contexts, for example to support the recent State of the Bays report and in the assessment of Victoria’s national parks. Indeed, in Victoria, environmental-economic accounting is a key feature in its recently released strategic plans for biodiversity and the provision of clean air and water.
Building on all of these developments, in November 2016 , Australia’s environment ministers “agreed to work together to develop a common national approach to environmental accounts”.
Closing the circle
However, while the recent advances in environmental-economic accounting have opened new possibilities, much work still remains. Measuring and accounting for our natural capital is only part of the story. We must integrate the information into the analytical tools and models that decision makers use. We must report natural capital measures in budget statements and annual reports. And, most importantly, we must use the information to build the conversation about the inherent connection between natural capital and economic activity.
The standard set of financial and economic data in the national accounts and corporate reports cannot be regarded as best practice any longer. Australia is a mature and wealthy society, the next step must be investment by governments and corporations in systems to account for natural capital and hence give themselves a complete set of information for economic decision making.