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Ecosystem Health and Sustainability

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Extending the production boundary of the Systemof National Accounts (SNA) to classify and accountfor ecosystem services

Mark Eigenraam & Carl Obst

To cite this article: Mark Eigenraam & Carl Obst (2018): Extending the production boundary ofthe System of National Accounts (SNA) to classify and account for ecosystem services, EcosystemHealth and Sustainability, DOI: 10.1080/20964129.2018.1524718

To link to this article: https://doi.org/10.1080/20964129.2018.1524718

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Extending the production boundary of the System of National Accounts (SNA)to classify and account for ecosystem servicesMark Eigenraam and Carl Obst

Institute for the Development of Environmental-Economic Accounting (IDEEA), Melbourne, Australia

ABSTRACTThere is a broad acceptance to depicting the relationship between ecosystems and humanwell-being using the concept of ecosystem services, emanating in large from the findings andresearch published in the Millennium Ecosystem Assessment in 2005 . While the genericconcept of ecosystem services provides an excellent platform for discussion, the ongoing lackof clarity surrounding the definition, classification and measurement of ecosystem services, isemerging as a barrier to more extensive collaboration across disciplines.

This paper applies the principles of national accounting to bring additional rigor andconsistency to the discussion on ecosystem services. In this paper we revisit four fundamentalaspects of the System of National Accounts (SNA) that underpin the measurement of theeconomy, namely, the definition of economic units; the definition of production; the recordingof transactions and the recording assets. By considering each of these aspects in the context ofthe United Nations’ System of Environmental-Economic Accounting, the paper presents aframework to describe the relationship between ecosystems and human activity that canthen be used to consistently define, classify, measure and account for ecosystem services.

ARTICLE HISTORYReceived 1 July 2018Accepted 12 September 2018

KEYWORDSEcosystem accounting;system of national accounts;ecosystem services;ecosystem asset;environmental accounting

Introduction

Over the past 10–15 years there has been a significantamount of work that has focused on defining, classify-ing and measuring ecosystem services. This work hasbeen driven by the need to demonstrate the impor-tance of the environment (natural capital or ecosys-tems) and the contribution it makes to social andeconomic wellbeing in the form of ecosystem services.

A broad acceptance of the relationship betweenecosystem services and human well-being exists, ema-nating in large part from the research commenced bythe Millennium Ecosystem Assessment (2005). Toembed this relationship into financial and economicdecision-making, a fundamental requirement is tomeasure and report this relationship using a fullyintegrated conceptual framework.

A number of approaches have been proposed, eachencompassing the key components of ecosystems,ecosystem services and human well-being in differentways (Haines-Young and Potschin 2010). However, arecent study (Cruz-Garcia et al. 2017) highlightedthat most approaches assume ecosystem servicesand well-being are interlinked without explicitly test-ing the strength of this hypothesis or providing amodel for application across all ecosystem services.Further, their study concluded that trade-offs andsynergies among different ecosystem services andthe links to specific population groups wereunderstudied.

Looking across these approaches there is still a lackagreement on the boundaries a model should applyfor measurement and reporting purposes including(i) spatial boundaries; (ii) the nature of the bound-aries and connections to other systems (e.g. the eco-nomic system); and (iii) the fundamental boundariesand links between ecosystem services and humanwell-being. This lack of agreement has limited thepotential for the collaboration and exchange of infor-mation and, most importantly, limited the wideruptake of ecosystem services thinking in policy anddecision-making. Consequently, policy and decisionmakers can choose to ignore the concept of ecosys-tem services entirely since experts do not speak with acommon language, or they are able to select a deci-sion-making framework based on political driversrather than necessarily good science and replicability.

However, the lack of clarity and consistency withrespect to boundaries has not hampered the generationof independent approaches to the measurement andassessment of ecosystem services (Chaudhary et al.2015; Hanna et al. 2018). Across the continuum of per-spectives on ecosystem services, and indeed recognizingthe many ways in which the ecosystem services conceptcan be applied (Pascual et al. 2017), there is strong agree-ment that the measurement of ecosystem services isimportant because it provides a means to describing theessential and multi-faceted relationship between humanactivity and the biophysical world in which we live.

CONTACT Mark Eigenraam mark.eigenraam@ideeagroup.com Institute for the Development of Environmental-Economic Accounting (IDEEA)

ECOSYSTEM HEALTH AND SUSTAINABILITYhttps://doi.org/10.1080/20964129.2018.1524718

© 2018 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permitsunrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

The premise of this paper is that the discipline ofaccounting can provide a means to bring additionalrigor and consistency to the measurement andreporting of ecosystem services, particularly in thecontext of integrating ecosystem services into discus-sions on finance and economics that are often at theheart of decision making. This paper builds on thework on ecosystem accounting that has been occur-ring under the banner of the United Nations’ Systemof Environmental-Economic Accounting (SEEA)(United Nations et al. 2014b).

The SEEA is a statistical accounting standard forintegrating environmental and economic data that isbuilt on the principles of national accounting asreflected in the United Nations’ System of NationalAccounts (SNA) (European Commission et al. 2009).The SEEA applies the same principles that are usedfor the standardized measurement of the economicsystem around the world, headlined in the measure-ment of Gross Domestic Product (GDP). Of course,the limitations of the SNA since its developmentaround World War II are widely known and indeedthe limitations of its ability to describe the linkagesbetween economic and environmental systems wasthe motivation for the original development of theSEEA (Bartelmus 1989).

However, from the perspective of data organiza-tion and policy influence, the national accounts mustbe considered a success. There are large and regulargovernment outlays allocated for the collection andprocessing of economic data to measure the structureand growth of economies, and policy makers workwith a common understanding of, and informationabout, concepts such as corporate profits, investment,wages, production and consumption. The measure-ment boundaries for, and interactions between, insti-tutions (economic units) are commonly understoodand broadly adopted to ensure that polices and deci-sions can be critically analyzed.

The application of national accounting principlesto ecosystems and ecosystem services measurement isnot new. Examples include the literature on exten-sions to wealth accounting (Barbier 2013), the con-nection of ecosystem services to GDP (Boyd andBanzhaf 2007), and, most comprehensively, work toextend the United Nations System of Environmental-Economic Accounting (SEEA) to incorporate ecosys-tem assets and services (United Nations et al. 2014a;Obst, Hein, and Edens 2016; Edens and Hein 2013).Work continues to advance the SEEA ecosystemaccounting framework through many initiativesaround the world (United Nations Statistics

Division 2018).1 In March 2018, a global processwas commenced to standardize as many elements aspossible of the initial SEEA Experimental EcosystemAccounting (SEEA EEA) (United Nations et al.2014b). This paper responds directly to various ele-ments of the research agenda of the global process,2

which includes advancing the understanding and lan-guage on the precise boundary between ecosystemsand economic units and improving consistency onthe measurement and accounting for ecosystemservices.

To describe a pathway forward, this paper revisitsfour fundamental aspects of the System of NationalAccounts (SNA) that underpin the measurement ofthe economy, namely, the definition of economicunits; the definition of production; the recording oftransactions and the recording of assets. By consider-ing each of these aspects in the context of the SEEA’secosystem accounting framework, we present a con-ceptual framework that clarifies an appropriate pro-duction boundary for measurement of ecosystemassets and their services and supports full integrationwith economic data as presented in the SNA.

System of environmental-economicaccounting (SEEA)

Work on the SEEA commenced in the early 1990sculminating in the adoption of the SEEA CentralFramework as an international statistical standard in2012 (United Nations et al. 2014a) and the SEEAExperimental Ecosystem Accounting (SEEA EEA)(United Nations et al. 2014b). The latter is the firstdescription of a framework for the integration ofecosystem services and measures of ecosystem extentand condition with the national accounts. A morecomplete history of the development of the SEEA ispresented in Obst and Vardon (2014).

The SEEA work on ecosystem accounting builds ondevelopments in ecosystem services measurement overthe past 10–15 years. This includes the work of Haines-Young (2010) which used a “cascade model” to distin-guish between ecosystem services and the associatedbenefits following the work of the MillenniumEcosystem Assessment (2005). An important elementof the work was the description and classification ofecosystem services into four broad groups includingprovisioning, supporting, regulating and cultural.Related work has looked at: clarifying the boundariesbetween final and intermediate services (Wallace 2007;Fisher, Turner, and Morling 2009; Boyd and Banzhaf2007); determining appropriate classifications of

1See Annex 1 for examples of initiatives by agencies including the UK, Netherlands, Conservation International, EUMeasuring and Assessment of Ecosystem Services (MAES), World Bank Wealth Accounting and Valuation of EcosystemServices (WAVES) and the UN Statistics Division.2See https://seea.un.org/content/seea-experimental-ecosystem-accounting-revision.

2 M. EIGENRAAM AND C. OBST

ecosystem services (Brown, Bergstrom, and Loomis2007; Costanza 2008; Haines-Young and Potschin2010; Landers and Nahlik 2013); delineating spatialareas for the measurement and analysis of ecosystemservices (Andersson et al. 2015); understanding theconnection between the underlying biophysical struc-ture and processes and the supply of a given ecosystemservices through spatially explicit models (Morse-Joneset al. 2011); and distinguishing the notion of “process”(referred to the operation of the ecosystem) from that of“capacity” (pertaining to the supply of specific services)(La Notte et al. 2017).

The SEEA EEA has proved a successful platform forglobal exchange of theory and practice in measure-ment, highlighting the need to record both ecosystemservices and ecosystem assets (reflecting the stock andflow elements of accounting). However, a key gap incurrent models is the way in which the measurementof ecosystem services should be aligned with the mea-surement of goods and services produced by economicunits as recorded in the national accounts.

Building on discussions on ecosystem accountingover the past 5 years as well as related research, thispaper describes a framework for the full integration ofecosystem services with the national accounts. Theapproach taken is to present the most relevant nationalaccounting principles and then demonstrate the extentto which these principles have been applied in themost common forms of environmental accountingnamely accounting for environmental flows such aswater, energy and GHG emissions. A particular featureof that discussion is the articulation of an environ-mental units model that, in conjunction with thenational accounting principles, permits the integrationof ecosystem services to describe a comprehensiveframework. The remainder of the document discussesthe main conceptual barriers that are resolved throughthe use of the framework and provides some examplesof the application of the framework.

SNA accounting features

There are four fundamental principles of nationalaccounting that provide the basis for recording anddetermining consistent accounting treatments. Theyare: (i) the definition of institutional (economic) units;(ii) the definition of production; (iii) the recording oftransactions; and (iv) the recording of assets. Each ofthese principles is explained briefly in this section andreflect the national accounting treatments described inthe SNA (European Commission et al. 2009).

SNA economic units

The SNA is built on recording and aggregating infor-mation about individual units within the economy. Inthe SNA, these are strictly referred to as institutional

units but are referred to here as economic units forease of exposition. In the SNA, economic units areconsidered from two perspectives. One perspectivereflects a unit’s legal, institutional and behavioralaspects. From this perspective economic units areclassified, following SNA guidance, to one of fiveprimary institutional sectors: non-financial corpora-tions, financial corporations, general government,households (including unincorporated businesses)and non-profit institutions (European Commissionet al. 2009). This perspective is most relevant whenconsidering the ownership of assets, economicreturns on assets and financial assets and liabilities.

The second perspective on economic units reflectsthe type of productive activity that a unit undertakesand leads to the grouping of units by industry type.Thus, at the highest level of industry aggregation, eco-nomic units can be grouped according to activities suchas agriculture, manufacturing, retail trade and profes-sional services. In the regular measurement of eco-nomic activity, reflected in measures of gross domesticproduct (GDP), it is the production perspective of eco-nomic units that is most commonly considered andreported.

At the heart of both perspectives is the concept ofa single economic unit that is observable in the econ-omy and distinguishable from other economic units.Each unit has a defined measurement boundary andforms the fundamental building blocks of economicmeasurement. In many countries, a register of eco-nomic units is maintained to ensure that economicsurveys and administrative data collections have themost complete coverage possible.

With respect to accounting for ecosystems andecosystem services and the application of nationalaccounting principles, it is relevant to establish eco-system units that are distinguishable from economicunits and incorporate perspectives of production andinstitutional context. Most importantly it is necessaryto establish the boundary between economic units,ecosystems and ecosystem services for measurementand reporting purposes.

SNA production

An economy is defined for measurement purposes bythe set of economic units that are resident within aspecified economic territory (European Commissionet al. 2009). This is usually a country, but concep-tually the principles can be applied at all spatialscales. Economic activity, as defined by GDP, is mea-sured in relation to the productive activity of each ofthese economic units. In broad terms, the concept ofproduction can be described as involving the produc-tion of goods and services by combining labor andcapital that is sold to other economic units (EuropeanCommission et al. 2009). However, since there are

ECOSYSTEM HEALTH AND SUSTAINABILITY 3

many different roles that economic units performranging from manufacturing, distribution and retail,to finance and government services, various treat-ments and conventions have been developed toensure the definition of the production boundary isprecise and measurable.3

The key aspect of the definition of production inthe SNA that is relevant to accounting for ecosystemservices is that production reflects a process in whichcapital and labor are combined with intermediateinputs (i.e., other goods and services such as electri-city and paper) to produce goods and services.Therefore, the SNA production boundary is definednot only in relation to the goods and services that arethe result of the production process—the outputs—but also in relation to the nature of the productionprocess that leads to the creation of those goods andservices. For example, the output of meals is consid-ered production in the SNA when made in a restau-rant but is excluded from production when made athome. Knowing both the output (meals) and thenature and context of the production process (busi-ness versus household) is essential in understandingand applying the production boundary.

The application of these two aspects of productionleads to the explicit exclusion from the SNA productionboundary of outputs that are created as a result of purelynatural processes (European Commission et al. 2009).

By way of example, the time of recording of theoutput of timber resources is different in those situa-tions where the timber is harvested from natural orunmanaged forests and those where the growth of thetimber resources is managed or cultivated, e.g. plan-tation forests. In the former, production is recordedat the time of harvesting the timber while in the latterproduction is recorded on a continuous basis as thetimber grows.

Applying the concept of the SNA production pro-cess is a very useful starting point when consideringecosystem processes and how they may be treated inaccounting terms. As well, full integration of ecosys-tem services with the national accounts requiresalignment with the SNA production boundary, andthe measurement and reporting of ecosystem servicesas inputs to the production process.

SNA transactions

The definition of economic units and the productionboundary provides a framework for the measurementand recording of transactions. Transactions in goodsand services are the most common focus for

measurement since they comprise the elements forreporting on changes in economic activity.

Themajority of transactions recorded in the nationalaccounts are transactions undertaken in monetaryterms—i.e. a good or service is exchanged for paymentin monetary terms between two economic units.However, because the production boundary is notdefined with respect to the use of money, there aresituations in which it is necessary to record transactionswhere no monetary payment takes place. The case ofsubsistence agriculture is one example, where house-holds produce and consume their own agricultural out-put. Here, the national accounts impute a transactionwithin the economic unit.Without recording this trans-action both the actual production and consumptionwould be missed. Perhaps, the most significant examplein many economies is the transaction in rent that isimputed for households that live in a dwelling they own.Again, there is a transaction that is imputed between thehousehold economic unit as a producer and the house-hold as a consumer.

Two key features emerge that are of particularrelevance in accounting for ecosystem services. Thefirst is that since the national accounts principles donot rely on the existence of a monetary payment, thereis an opening to consider ways in which nationalaccounts principles can be applied to account forecosystem services, given that these services are notnormally paid for in monetary terms. Secondly, build-ing on the approaches that have been developed toaccount for non-monetary transactions in the SNA,the potential exists to impute transactions betweenecosystems and economic units and hence build abroader, more integrated, system of accounting thatencompasses both economic and ecosystem serviceflows.

SNA assets

The final SNA accounting principle introduced hereconcerns the recording of stocks and changes instocks of economic assets. Economic assets come ina range of types including produced assets, inven-tories, natural resources (e.g. timber, fish, minerals),non-produced intangible assets (e.g. brands, patents,goodwill) and financial assets (European Commissionet al. 2009). The stocks of these assets may changethrough investment, depreciation, or catastrophic lossamong many other reasons.4

The common feature of economic assets is thatthey are included in the accounts by virtue of provid-ing the owner or manager of the asset, the economic

3Readers are referred to SNA 2008 Chapter 6 for a detailed description of the production boundary underpinning themeasurement of GDP.4SNA 2008 Chapters 10 and 13 provide a thorough description of the scope, definitions and accounting treatments ofstocks.

4 M. EIGENRAAM AND C. OBST

unit, an expectation of receiving benefits in the future(European Commission et al. 2009). Economic bene-fits are the economic returns received by the owner ofthe asset either through income generated from theasset (e.g. net income from production by usingmachinery, equipment, buildings and land; interestincome from financial assets) or through the assetholding a re-sale value—where the expected saleprice reflects a future economic benefit. The combi-nation of ownership by economic units and the flowof future economic benefits describes the SNA assetboundary, i.e. the set of assets that are included inSNA-based measures of wealth.

With respect to ecosystems and ecosystem services,application of the current SNA boundaries will meanthat the benefits arising from the flows of many ecosys-tem services are not included in SNA-basedmeasures ofwealth since they are not considered economic benefits.By way of example, a forest ecosystemwill have value inthe national accounts to the extent that the timberresources it holds provide economic benefits to eco-nomic units. However, the supply of air filtration ser-vices will not be included as an economic benefit sincethis activity is outside the scope of the definition ofincome from production. Hence, the total value of theforest will not incorporate the value of this ecosystemservice in a standard national accounts treatment.

In this situation, it is the definition of the produc-tion boundary that determines the scope of economicbenefits and hence the measurement of wealth. Thistight connection between the production boundaryand the asset boundary is fundamental from a nationalaccounting perspective but commonly unappreciatedwhen considering the integration of ecosystem stocksand flows into the national accounting system.

Therefore, a framework that accounts for ecosys-tem services must also provide a logic for the exten-sion of the asset boundary. Indeed, this goes beyondthe measurement of wealth but also to the coreaccounting notions of investment and depreciation.Investment and depreciation are flows that relate tochanges in assets. To the extent that some parts of thevalue of an ecosystem asset are excluded from theasset boundary, then measures of investment anddepreciation (or degradation in the case of ecosys-tems) will be similarly affected. In short, to achieve acommon goal of the early founders of the SEEA andproduce degradation adjusted measures of GDP, theconceptual framework must accommodate both pro-duction boundary and asset boundary considerations.

The following two sections describe the applica-tion of these four key national accounting principlesto accounting for ecosystem services and assets.Following the logic above, the initial focus is ondefining relevant units for ecosystem accountingand then proceeding to discuss the application ofthe concepts of the production boundary, transac-tions and assets.

Defining units for ecosystem accounting

One of the key features of the SEEA CentralFramework is accounting for physical flows betweenthe economy and the environment as depicted inFigure 1. Here, the economy is defined by the set ofoutputs (i.e. goods and services) within the standardSNA production boundary. The additional flowsrecorded in the SEEA Central Framework are naturalinputs and residuals. The physical flows of naturalinputs and residuals are accounted for in physicalsupply and use tables and examples include accounts

Figure 1. Physical flows in the SEEA Central Framework, Source: UN et al 2014a, Figure 2.1.

ECOSYSTEM HEALTH AND SUSTAINABILITY 5

for flows of water, energy, greenhouse gas (GHG)emissions, solid waste, and elements such as nitrogenand phosphorous.

The SEEA Central Framework describes variousaccounts for recording flows between a standard setof economic units (as described in the previous sec-tion) and the environment, where the environment iseffectively considered as a single unit, without spatialspecificity or variation. This framing of the connec-tion between the environment and the economy issufficient for the purposes of the SEEA CentralFramework since the broad aim is to start from theperspective of the economy as a distinct system andrecord the interactions between it and the environ-ment. In physical terms, for any single type of flow(e.g. water, energy, GHG emissions), the SEEACentral Framework applies mass balance recordingprinciples which also ensures a balance between sup-ply and use as required for national accounting.

The definition of units for ecosystem accounting ispresented in this paper as an extension to the SEEACentral Framework. In this paper, rather than treat-ing the environment as a single unit that supplies andreceives all environmental flows from the economy,the aim is to partition the environment into multiple,ecologically meaningful and mutually exclusive units.This partitioning is completed is two stages.

In the first stage the environment is separated intofour primary layers. Figure 2 shows a stylized por-trayal of these layers, namely the atmosphere, thebiosphere, the regolith and aquifers. The atmosphereincludes gases that are around the earth and processesincluding the transfer of heat from the sun, weather,smog and haze, climate and rain. The biosphere is thezone of the earth and adjoining parts of the atmo-sphere in which plants and animals exist. The regolithrefers to the rocks and soils on the crust of the earth.Aquifers (confined and unconfined, saturated andunsaturated, isotropic and anisotropic) containgroundwater which flows through the spaces betweengrains of soil or rock, connects with rivers, streams,lakes and wetlands and feeds trees and vegetation.

In the second stage, each layer is divided up intounits. For example, the atmosphere can be dividedinto airsheds, aquifers into artesian basins, and theregolith into areas based on soil types. The focus inthis paper is on the biosphere as the basis for thedelineation of mutually exclusive (in spatial terms)ecosystem units. Figure 3 gives a stylized portrayal ofthe different units.

Before discussing the delineation of ecosystemunits in more detail, it is important to recognizethat the same mass balance and accounting principlesthat underpin the physical supply and use tables ofthe SEEA Central Framework, can be applied tocompile extended supply and use tables that recordthe physical flows between all the different environ-mental layers and units (both vertically and horizon-tally), and with economic units. Further, therecording of these physical flows can be combinedwith the recording of stocks of the specific substancesor elements that are present in any unit at a point intime. This combination of recording stocks and flowsfor a given substance or element including betweendifferent environmental units is reflected in twoSEEA accounts—the water resources asset account(United Nations et al. 2014a) and the carbon stockaccount (United Nations et al. 2014b).

As introduced above, the delineation of ecosystemunits for use in ecosystem accounting, requires parti-tioning of the biosphere. In the same way that eco-nomic units can be delineated on the basis of theirdifferent production and ownership characteristics,ecosystem units are delineated, in a large part, onthe basis of having different biophysical characteris-tics (e.g. vegetation cover, ecological structure) per-forming different environmental functions. It isassumed that within each ecosystem unit the ecolo-gical structure is relatively homogenous, and that theunit can be differentiated from its neighbors.Depending on the purpose, there may be interest indelineating ecosystem units using more than vegeta-tion and incorporating additional information, forexample, on the regolith (soils). In this model, thiscan be achieved through integrating environmentalunits for two layers, the biosphere and soils.

Ecosystem units can be delineated in greater orlesser detail, reflecting the application of a classifica-tion of ecosystem types. That is, each ecosystem unitis classified to a single ecosystem type such as a forest,wetland, grassland, etc. Since the broad aim in eco-system accounting is to encompass all areas within acountry, then by extension, the delineation of ecosys-tem assets extends well beyond what might be con-sidered purely natural areas to incorporateagricultural and urban areas for example. Further,the principles of delineating units as spatial areas asdescribed here can be applied to marine and coastalareas and inland waters. In principle, this approachFigure 2. Types of environmental units.

6 M. EIGENRAAM AND C. OBST

can be used to establish a global set of mutuallyexclusive ecosystem units for accounting purposes.

An SNA based approach to accounting forecosystem services

Extending the SNA production boundary

The idea that ecosystem units might be consideredproducing units was discussed in SEEA EEA Chapter6 as a possible means by which ecosystem units andecosystem outputs might be integrated with the SNAaccounts. In that chapter, and also in Edens and Hein(2013), the producing unit approach was discussedalongside an approach in which ecosystems are treatedas assets owned or managed by an existing economicunit (e.g. farms managing agricultural ecosystems).However, neither the SEEA EEA nor Edens and Heinprovided a complete solution as to how the productionboundary could be extended in line with the SNA. Inthis section we apply the national accounting principlesdiscussed above to describe the connection betweenecosystem units and SNA production. Two featuresare key to making this connection:

● First, each ecosystem unit is considered a pro-ducing unit that supplies ecosystem services,analogous to the production perspective of eco-nomic units described earlier.

● Second, the supply of ecosystem services isunderstood to be the outcome of ecological pro-cesses that reflect the ecological structure andfunction of the ecosystem unit. These processescan be considered analogous to the productionprocesses of economic units.

The extension to recognize ecosystem units as addi-tional producing units (i.e. additional to the standardset of economic producing units) provides the basisfor recording the output of ecosystem units as addi-tional production. Thus, flows of ecosystem servicescan be recognized as additional outputs from a largerset of producing units and, most significantly, theproduction boundary of the SNA is extended. Theeffect of this treatment is to define an extended

production boundary that considers natural and eco-logical processes as being included alongside mea-sures of standard economic output.

The extensions described here recognize ecosystemunits as separate producing units while remainingconsistent with national accounting principles andcan be justified on the following grounds.

(1) There are no limits in national accounting onthe inclusion of additional units. The record-ing of transactions is unaffected, conceptually,by the number of units within scope of a set ofaccounts. It is true that where there are moreunits there are more transactions to berecorded, but the underlying accounting prin-ciples are unaffected. The inclusion of addi-tional units is also consistent with commonpractice in corporate accounting where largefirms identify cost or profit centers and thusrecord (internal) transactions with other partsof the business.

(2) It is aligned with the current treatment ofowner-occupied housing in the SNA. For thisactivity, the houses/dwellings are effectivelyproducing units that deliver services to eco-nomic units, i.e. households. These units donot utilize labor as an input and hence thesupply of services completely reflects outputsattributable to the underlying asset. For eco-system accounting, the soil and the ecosystemcan be treated in the same way. They are bothproviding services to economic units, say afarmer.

(3) It allows for the recording of the supply ofmultiple ecosystem services from a singleecosystem asset to multiple units (i.e. toboth economic and other ecosystems). Thisis quite different from standard accountingapproaches to accounting for assets whicheffectively assumes that each asset providesa single service to a single user. Consideringecosystem assets as under the total manage-ment of a single existing economic unit thus

Figure 3. Stylised portrayal of ecosystem units.

ECOSYSTEM HEALTH AND SUSTAINABILITY 7

requires a reworking of accounting entries toallow for multiple ecosystem outputs.

(4) Although not at all widespread, there areemerging situations in which ecosystem unitsare being recognized as distinct entities in law(Charpleix 2018; Zimmer 2017). This buildson initial thinking in legal circles on thispoint from Stone (1972). The recognition ofecosystems as distinct entities for accountingpurposes is a natural corollary to recognisingan ecosystem as having legal rights. By exten-sion, giving an ecosystem legal rights infersthat it needs to be accounted for as a legalentity and as one which engages with otherlegal entities, including economic units.

Recording transactions in ecosystem services

According to the SNA 2008, economic flows encom-pass the creation, transformation, exchange, transferor extinction of economic value; and reflect changesin the volume, composition, or value of an institu-tional (economic) unit’s assets and liabilities(European Commission et al. 2009). A transaction isa type of economic flow that is either an interactionbetween institutional (economic) units by mutualagreement or an action within an institutional (eco-nomic) unit that is analytically useful to treat like atransaction, often because the unit is operating in twodifferent capacities. Examples of this second type oftransaction include depreciation, subsistence agricul-ture and own account capital formation.

For ecosystem services, building on the extensionof the production boundary just described, recordingadditional output, or supply, must imply recordingadditional consumption or use. Consistent with thetreatment of all other production of goods and ser-vices, this requires the recording of transactions inecosystem services between the supplying unit, in thiscase the ecosystem unit, and the receiving unit.

Where the receiving unit is another ecosystem orenvironmental unit then the ecosystem service shouldbe considered intermediate. Where the receiving unitis an economic unit then the ecosystem serviceshould be considered final. Therefore, the same typeof ecosystem service, say water provisioning, can beeither final or intermediate depending on the type ofreceiving unit. This is completely analogous to thetreatment of goods and services in the SNA. Forexample, the purchase of bread by a household istreated as final consumption, whereas the purchaseof bread by a restaurant is treated as intermediate.Trying to limit the conceptual framework for ecosys-tem accounting to only final ecosystem services,

necessarily implies limiting the view of ecosystemsas producing units and thus limits the potential tosee the application of a more complete ecosystemaccounting treatment and fully encompass the roleof ecosystem units.

Recognizing ecosystem services as transactionsbetween ecosystem units and economic units is sig-nificant since it permits the seamless application of allrelevant accounting principles concerning produc-tion, consumption, income and assets. In this regard,the approach described here does not treat ecosystemservices and related ecological functions as special orunique. Rather it abstracts from these ecological rea-lities (while still ensuring their influence) and con-siders ecosystem units to be operating alongside themix of different economic units. To be clear, there islittle homogeneity in the context of economic units—units involved in agriculture, construction, manufac-turing, retail, finance and entertainment all have dis-tinct production processes. Incorporating ecosystemprocesses as simply another type of production pro-cess is thus not daunting and, it should be clear thatin doing so, the potential for full integration of eco-system services into standard accounting is real.

Defining ecosystem assets

To complete the application of accounting principles,it follows that since the production boundary has beenextended and the level of output has been increased,then the measure of income that is recorded will beincreased (reflecting “sales” of ecosystem services) andthe set of flows within the scope of the concept ofeconomic benefits is extended. With an extended set ofeconomic benefits, the asset boundary of the SNA isbroadened such that additional value can be attributedto ecosystem units, which are equal to the net presentvalue of the future flow of ecosystem services. Thisadditional value can be readily interpreted as a value ofan ecosystem asset and added to the value of otherassets already included in measures of wealth (asundertaken in wealth accounting studies e.g. (Lange,Wodon, and Carey 2018).5

Since the future flow of services can be attributed toeach individual ecosystem unit then each ecosystemunit can also be considered an individual ecosystemasset. Recognizing ecosystem units as ecosystem assetssupports the application of a range of other accountingconcepts such as investment, depreciation and degrada-tion and ensures that the incorporation of ecosystemsand ecosystem services within the national accountingsystem is both seamless and comprehensive.

A concern may be raised that, in many cases,ecosystem services are inputs to the production of

5This estimated value is not intended to reflect an all-encompassing or complete “value of the environment” thatincorporates, for example, intrinsic and cultural values.

8 M. EIGENRAAM AND C. OBST

goods and services already within the standard SNAproduction boundary. Examples include the flow ofecosystem services into agricultural and other pri-mary production. However, the treatment in thisframework is to show a transaction in ecosystemservices (for primary production it will commonlybe reflected in biomass growth) from the newly estab-lished ecosystem unit (e.g. the agricultural land) tothe relevant economic unit (e.g. farmer). Explicitlyrecognizing this transaction has the effect of increas-ing total output and total intermediate consumptionby the same amount (i.e. the supply and use ofecosystem services). As a result, total value-added(the difference between output and intermediate con-sumption) remains unchanged but the contributionand value-added of the ecosystem asset is made expli-cit. Importantly, since the ecosystem asset being man-aged by the primary producer will also supplyecosystem services to other units (e.g. carbon seques-tration), these additional outputs can be recorded inthe system and the potential trade-offs between dif-ferent management practices and sets of outputs canbe accounted for and assessed.

The core ecosystem accounting framework(CEAF)

Using the building blocks of units, production, trans-actions and assets as described above it is now possi-ble to describe a simple yet powerful core frameworkthat underpins the application of ecosystem account-ing. The core ecosystem accounting framework(CEAF) described here (see Figure 4 below) containsfour key elements. Ecosystem assets are delineated interms of spatial areas which have an extent (e.g.measured in hectares) and a condition (or quality),and each asset supplies ecosystem services which are,in turn, used in the production of benefits.

In many ways, the CEAF reflects other approachesthat have sought to establish the connection betweenthe use and supply of ecosystem services. Examplesinclude the work of Banzhaf and Boyd (2012; 2007),the cascade model of Haines-Young and Potschin(2010) and, most recently, in the work of La Notte& Maes, (2017) in describing an “ecological” supplyside perspective. The advance described in this paperis not in presenting the established logic of the con-nection between ecosystems and the benefits theydeliver, but rather in grounding this logic for

measurement and reporting purposes using theaccounting principles of the SNA.

It is important to distinguish the core frameworkdescribed here (and the other supply focusedapproaches to ecosystem services just noted), fromuse or demand focused models and definitions ofecosystem services. In particular, we note that in theMillennium Ecosystem Assessment, ecosystem serviceswere defined as “the benefits that people obtain fromecosystems” (Millennium Ecosystem Assessment2005). This approach to defining ecosystem servicesimplicitly starts from a use perspective—i.e. the way inwhich people interact with the environment and drawbenefit from it. Indeed, a human use perspectiveappears to remain the most prominent way of framingecosystem services as reflected in the nature’s contri-butions to people framework (Pascual et al. 2017)being developed by the Intergovernmental Platformon Biodiversity and Ecosystem Services (IPBES).

Unfortunately, a use or benefit-based approach, i.e.starting from the right-hand side of Figure 4, tends tosuffer from not making a sufficiently refined connec-tion to the actual operation (function and processes)of the ecosystems themselves. This limits the poten-tial for the resulting information set to guide policyand ecosystem management since, by necessity, thesemust involve intervention at the asset level, i.e. start-ing from the left-hand side of Figure 4.

Accounting for ecosystem transactions andphysical flows

One of the challenges in understanding the account-ing-based, transactions approach described above, isthat there is commonly a misconception about thelinks to the recording of physical flows, such asenergy, water or GHG emissions. Accounting forphysical flows following mass balance principles is akey component of the SEEA Central Framework(United Nations et al. 2014a).

In a number of situations, the physical flowsrecorded will correspond to transactions in ecosystemservices. For example, for provisioning services invol-ving the extraction of timber or fish, the quantity ofecosystem service transacted will equal the gross phy-sical flow of the material from the environment to theeconomy. However, for many ecosystem services theconnection with the physical flow will not be directand the general observation is that there is no require-ment that transactions in ecosystem services satisfy a

Figure 4. Core ecosystem accounting framework.

ECOSYSTEM HEALTH AND SUSTAINABILITY 9

mass balance principle of recording. For example,flood (regulation) control by mangroves in coastalareas does not have an equivalent physical flow thatquantifies the service directly, even though the asso-ciated flows of water still satisfy mass balanceprinciples.

Figure 5 below is used as an example to describephysical flows and transactions between environmentaland economic units. Following a national accountsframing, a transaction occurs between two economicunits—in this case the water authority and the farmer—when the farmer buys water for irrigation of pasture (anagricultural ecosystem). As an outcome of the transac-tion there are changes in the volume and compositionof water resources for each environmental unit, whichcan be recorded as physical flows between units. Thesoil receives 100 units of water from the farmer viairrigation, and an additional 40 units of water fromprecipitation (rain) from the atmosphere. Thesechanges are all added to the 20 units of water alreadystored in the soil resulting in 160 units of water in thesoil. The farmer’s ecosystem (pasture) is undertakingthe production process of biomass accumulation viaphotosynthesis using 90 units of water from the soil asan input of which 80 units are transpired (back to theatmosphere) during photosynthesis, with 10 units ofwater captured in the biomass (hay) that is harvestedby the farmer. Finally, there are 25 units of water lostfrom the soil through evaporation (to the atmosphere)and 30 units moving into groundwater.

By recording all physical flows between all units, itis possible to measure and report all water in thesystem. Typically, soil water balance is calculated toaccount for i) the flows of water in and out of the soilprofile and ii) the volume of water stored in the soilprofile that is available to plants for growth (see

Equation 1 below). The balance of all water flows inand out of the soil can be accounted for and nets tozero, with 15 units of water being stored in the soilfor the next season (closing stock in Equation 1below).

Soil Water Balance = 20 opening stock + 100irrigation + 40 rainfall – 90 ecosystem – 30 ground-water – 25 evaporation – 15 closing stock

The farmer then utilizes produced capital (trac-tors) and human capital (labor) to harvest the bio-mass which is then sold in the market (to otherfarmers) as hay. There has been a transaction in abiomass accumulation service between the ecosystemand the farmer. The farmer is utilizing ecosystemprocesses to produce biomass which he is then com-bining with other inputs (capital and labor) to makehay and sell to other economic actors.

In this example, it is important to recognise that notall physical flows of water described above, whichthemselves reflect ecosystem and hydrological pro-cesses, are recorded as transactions in ecosystem ser-vices. For example, the physical flow of water betweenthe atmosphere and the ecosystem recorded as preci-pitation is not a transaction in ecosystem services.

Ecosystem services are an accounting constructdesigned to show the relationship between the supplyingecosystem asset and the using economic unit. Recordingthem is undertaken in parallel with the recording ofecosystem processes and physical flows, in the sameway as transactions in motor vehicles (sales) is under-taken in parallel with recording the motor vehicle pro-duction process. It is the role of ecosystem accounting totranslate biophysical information recorded in physicalflow accounts into transactions in ecosystem servicesthat can then be fully integrated into standard economicaccounting.

Figure 5. Linking economic units with environmental units.

10 M. EIGENRAAM AND C. OBST

Recording the production of ecosystemservices

Building on the distinctions between recording phy-sical flows and recording transactions in ecosystemservices, this section discusses in more detail how thecore ecosystem accounting framework can be appliedto record the flow of ecosystem services that areproduced as a result of ecosystem processes.Ecosystem processes include the capture of light,energy and carbon through photosynthesis, the trans-fer of carbon and energy through food webs, and therelease of nutrients and carbon through decomposi-tion (Odum and Barrett 2005). In general terms,these processes transform energy, nutrients andwater into biomass. This production of biomass canbe considered an ecosystem service and following thelogic of economic production functions, this service(biomass production) can then be combined withcapital and labor and ultimately harvested as an out-put, say logs or hay.

Other ecosystem services are also producedthrough these types of ecosystem processes, includingthe stabilization of soil and wind regulation throughthe existence of root structures and above groundbiomass, respectively. More complex processes, likewater purification, also occur where say water rich innutrients enters an ecosystem and then leaves theecosystem without nutrients.

To more fully understand the relationship betweenthe condition of an ecosystem and the supply ofecosystem services it is necessary to understand thelink between ecosystem condition and ecosystem pro-cesses. In practice, it is the ecosystem processes thatare manipulated and managed by economic units(e.g. farmers) to influence the supply ecosystem ser-vices, and it is these management activities that affectthe condition of the ecosystem. Since ecosystemassets have the potential to produce more than oneecosystem service simultaneously, it is important tounderstand how different management activitiesaffect ecosystem processes and thus result in differentcombinations of ecosystem services. The core ecosys-tem accounting framework described here is designedto record information in a manner that informs thetrade-offs in ecosystem management, many of whichare commonly ignored.

Describing and classifying ecosystem services

In this section we show how using the transaction-based approach of the core ecosystem accountingmodel can be applied to structure and approach tothe description and classification of ecosystem ser-vices. Given the basis of the accounting model, wehave described, the classification will be aligned withthe SNA. In the following, ecosystem services are not

classified as provisioning, regulating or cultural. Suchhigher-level groupings can be undertaken at laterstage if required but they do not assist in identifyingand classifying ecosystem services in a transaction-based model.

Table 1 reflects a structured approach to describ-ing ecosystem services based on the CEAF. For aselection of ecosystem types and ecosystem services,the table demonstrates how services can be describedand subsequently classified. Columns one and twodescribe the ecosystem and the ecosystem processes,column three shows the ecosystem service and thelast five columns focus on the connections to eco-nomic units and associated inputs, processes andbenefits. Each row describes a specific service. Thereis no intention to be exhaustive in this table. Insteadthe focus is on demonstrating how the core ecosys-tem accounting framework can be applied consis-tently across many situations.

The first example in Table 1 is a pasture ecosystem.The ecosystem process (or production process under-taken by the ecosystem) is biomass accumulation. Theoutput that results from biomass accumulation isgrass. The economic unit—the farmer—uses economicinputs including fertilizer, labor and machinery tograze cows on the grass provided by the ecosystem.The farmer gains economic benefits by selling thecows. There has been a transaction between the farmerand the ecosystem in the form of grass. There are alsophysical flows occurring. For instance, the farmer isapplying fertilizer to the ecosystem—the ecosystemsees the fertilizer as nutrients (N, P, K) and usesthem in its production process.

The second example is based on a wheat ecosys-tem. It is similar to the pasture example except theecosystem output in this case is a wheat plant, notwheat grain. Rather, the economic unit, the farmer,then uses labor and machinery to harvest the wheatgrain from the plant. The economic benefit isreflected in the wheat grain sold. Above we notedthe services provided by soil. In the case of a wheatfarm the remainder of the wheat plant will be decom-posed by the soil and stored as nutrients and biomass(carbon) in the soil for the next season. The soil isproviding nutrient cycling and storage services to theecosystem which in turn is benefiting the farmer. TheCEAF can be used to explicitly recognize these soilservices as they will vary based on the type andcondition of soil and should also be reflected in theasset value of the soil (land price). An economic unitwishing to buy the land will assess the capacity of thesoil to support alternative ecosystems (wheat, barley,maize, pasture, etc.) and calculate the expected eco-system services and price them according to the eco-nomic benefits they can provide.

The natural forest ecosystem provides a largersuite of ecosystem services which have both economic

ECOSYSTEM HEALTH AND SUSTAINABILITY 11

and non-economic benefits. The ecosystem process isthe same, biomass accumulation, and the ecosystemservice is in the form of trees. The forester usesmachinery and labor to harvest the trees and receiveseconomic benefits when they sell the logs. In thisexample we have also attempted to differentiate theprocess of biomass accumulation to reflect changes inthe structure of the trees. Structural attributes of thetress may not be apparent or important when thetrees are young but as they age the structure isimportant because it provides habitat services forspecies (birds, possums, etc.).

The final example is that of a wetland. Biomassaccumulation occurs as in other terrestrial systemsbut in the form of water plants and algae. The plantsand algae are a food source for animals that live inthe wetland including fish and ducks. The link to soilis more complex for a wetland because the soil profilegenerally contains a significant upper layer of mudthat provides nutrient processing services to the wet-land. The soil is still there to provide a growingmedium for many of the larger water plants as well.The water filtration service may be final or intermedi-ate depending on whether the water is used by aneconomic unit or an ecosystem unit, respectively.

The storage of water in the wetland for use later isalso a final ecosystem system service because thewater is being used by an economic unit for irrigationpurposes. The economic unit (the farmer) usesmachinery and fuel as additional inputs to pumpthe water out of the wetland to be used elsewherefor irrigation. There is a transaction between the wet-land and the farmer, the water can be valued ineconomic terms based on the benefits it is providing.

These examples demonstrate how the core ecosys-tem accounting framework can be used to describeand classify ecosystem services using a transaction-based approach and are consistent with the SNA andcan be fully integrated with SNA accounts.

Conclusion

In this paper, we have shown there is an alternative tousing a benefits-based approach to defining andrecording ecosystem services. First, we clarified theunits that are involved by extending both the SEEACentral Framework and the SEEA EEA and thenusing those units to account for all transactionsbetween ecosystems and economic units.

Second, by adopting the SNA construct on pro-duction and transactions it is possible to view ecosys-tem processes as analogous to economic productionprocesses. Once ecosystem units are viewed as produ-cing units we have shown it is relatively straightforward to then identify the transactions takingplace between the units while continuing to applynational accounting principles.Ta

ble1.

Transactionbasedclassificationof

ecosystem

services.

Ecosystem

Units

Ecosystem

Process(Produ

ction)

Ecosystem

services

(Outpu

ts)

Econ

omic

Units

Econ

omicinpu

tsEcon

omicprocess

Econ

omicou

tput

(benefits)

Finalo

rInterm

ediate

Pasture

Biom

assaccumulation

Grass

Farm

erFertilizer,labo

r,machinery,etc.Grazing

Cow

Final

Wheat

Biom

assaccumulation

Wheat

plant

Farm

erFertilizer,labo

r,machinery,etc.Farm

ing

Wheat

grain

Final

NaturalForest

Biom

assaccumulation

Trees

Forester

Machinery

andlabo

rForestry

Logs

Final

Biom

assaccumulation

-structural

Habitat

Governm

ent

Pesticides,w

eedicides

Governm

entmanagem

entof

aforest

Preservatio

nof

speciesandtourism

Finaland

Interm

ediate

Water

regu

latio

nGovernm

ent

Seedlingtrees

Governm

entmanagem

entof

forest

Floodprotectio

nFinaland

Interm

ediate

Biom

assstorage

Carbon

sequ

estration

Society

Seedlingtrees

Governm

entmanagem

entof

forest

Carbon

storage

Finaland

Interm

ediate

Windregu

latio

nIndividu

alSeedlingtrees

Governm

entmanagem

entof

forest

Winddamageprotectio

nFinaland

Interm

ediate

Wetland

Biom

assaccumulation

Water

regu

latio

nSociety

Weedandpest

control

Governm

entmanagem

entof

wetland

Floodprotectio

nFinaland

Interm

ediate

Water

holdingor

capture

Water

storage

Farm

erMachinery

(pum

p)Irrigationfarm

erWater

Final

Nutrient

captureandprocessing

Water

filtration

Society

Weedandpest

control

Governm

entmanagem

entof

wetland

Cleanwater

Finaland

Interm

ediate

Biom

assstorage

Carbon

sequ

estration

Society

Seedlingtrees

Governm

entmanagem

entof

wetland

Carbon

storage

Finaland

Interm

ediate

12 M. EIGENRAAM AND C. OBST

Finally, the goods and services produced by anecosystem can then be clearly defined and recordedas ecosystem services.

The approach described here has the followingadvantages. It provides:

● a clear distinction between recording physicalflows and transactions between units

● a framework to link soil, land and ecosystemsthus providing a better link between the SEEACF and SEEA EEA

● an explanation of the difference between ecosys-tem services and benefits by starting from asupply side perspective

Ultimately, the treatment of ecosystems in the coreecosystem accounting framework is completelyaligned with the national accounting philosophy ofrecording stocks and flows that are of analytical andpolicy relevance. There is no doubt that a reasonableproportion of flows of ecosystem services are cap-tured in the current accounting entries of the SNAbut in standard accounts these flows of ecosystemservices are invisible. Ecosystem accounting allowsthese ecosystem services flows to be explicitlyrecorded.

More significantly, there are the well-establishedand significant problems of ignoring flows of ecosys-tem services that are not incorporated at all in stan-dard accounts and there is also the general lack ofrecognition of the capital costs of degrading ecosys-tems and, in parallel, the improvements in capacityarising from good ecosystem management. Withoutan approach that makes information on these stocksand flows visible, the national accounts system isincomplete and insufficient for policy and analyticalpurposes. This paper solves a key aspect of creating amore complete picture of the relationship betweenecosystems and human well-being.

Disclosure statement

No potential conflict of interest was reported by theauthors.

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