Recording changes to the stock of natural resources

1
Recording changes to the stock of natural
resources
London Group Rome, December 2007
Peter Comisari Australian Bureau of Statistics
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SEEA 2003

• Characterised by multiple treatment options for
  some issues.
• If SEEA is to become a statistical standard,
  these options must be reconstituted as clear
  accounting recommendations.
• Box 10.4 (SEEA, Ch.10) presents 3 options for
  recording changes to the stock of environmental
  assets.

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Option C1

• Records the consequences of extraction of
  natural resources in the extended generation of
  income account leading to a depletion-adjusted
  operating surplus, but the corresponding
  increases in resources are shown in the other
  changes in assets account.

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Option C2

• Records both the consequences of extraction and
  additions to natural resources in the extended
  generation of income account. Additions cover
  both the natural growth of biological resources
  and discoveries and reappraisals of subsoil
  deposits.

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Option C3

• Is one where there are no entries for extraction
  and addition to natural resources in the extended
  generation of income account of those assets
  which have been reclassified as developed natural
  assets and which are therefore recorded in the
  same way as produced assets.

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Option C3

• Option C3 hinges on the concept of a developed
  natural asset
• London Group rejected the concept of a
  developed natural asset at the Johannesburg
  meeting
• Option C3 is removed from further consideration

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Environmental assets

• SEEA identifies the following as environmental
  assets
• Natural resources (consisting of mineral,
  energy, soil, water and biological resources)
• Land and associated surface water and
• Ecosystems.

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Environmental assets, continued..

• With the exception of mineral and energy
  resources, environmental assets are considered to
  be renewable.
• Mineral and energy resources however, are
  considered to be non-renewable.
• This renewable / non-renewable distinction is
  important in considering the various options.

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Natural Resources

• SEEA Box 10.4 heading refers to environmental
  assets, but descriptions of individual options
  relate to the narrower grouping of natural
  resources.
• As such, discussion of options generally relates
  to natural resources.

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Environmental assets the SNA

• SEEA and the SNA should reconcile where
  possible.
• Some environmental assets are also economic
  assets under 1993 SNA, e.g. mineral and energy
  resources.
• Under SNA, natural processes without human
  involvement are not considered economic
  production.
• Therefore, uncontrolled natural growth of
  renewables, or additions to non-renewables are
  not SNA production.

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SNA cultivated assets

• However, natural growth of SNA cultivated
  assets is considered to be economic production.
• Growth of cultivated assets that are capital
  in nature (e.g. grape vines), enter the output of
  the producing unit as own account capital
  formation.
• Growth of cultivated assets that are not
  capital in nature (e.g. grain crops), enter the
  output of the producing unit as inventories.

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Are non-renewable natural resources produced
assets?

• ABS paper Depletion in the SEEA Narrowing down
  the options was presented at the March 2007
  London Group meeting.
• paper argued that discoveries of mineral and
  energy resources are not produced, and therefore
  not part of economic production and income.
• Draft SNA93Rev.1 - discoveries are non-produced,
  and therefore should be recorded in the other
  changes in volume of assets account.

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Are non-renewable natural resources produced
assets?

• Arguments in favour
• Other changes in volume of assets are considered
  to be unexpected and beyond the control of the
  units involved. In practice however, new
  discoveries may be considered predictable.
• New discoveries are dependant on dedicated
  mineral exploration, which clearly is a
  productive activity.

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Are non-renewable natural resources produced
assets? continued

• Arguments against
• While it may be argued that new discoveries are
  related to mineral exploration activity, it is
  difficult to see how mineral exploration assets
  produce new mineral and energy resources.
• If mineral exploration produces the new
  mineral and energy resource, the value of
  discoveries should be the price charged by the
  exploration enterprise for the exploration.

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Are non-renewable natural resources produced
assets? continued

• Had Option B3 been accepted by LG, mineral and
  energy resources would be viewed as produced
  assets.
• Concluding that non-renewable natural resources
  are non-produced assets, presents an apparent
  accounting asymmetry.
• i.e. depletion of non-renewable resources is
  charged against production. But new appearances
  of the same non-renewable resource excluded from
  production.

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Depletion of renewable natural resources

• ABS paper Depletion of renewable environmental
  resources (Bain, 2007).
• Proposes net natural growth of renewables be
  added to resource rent, which in turn is offset
  by the value of resource depletion (CONC).
• Leads to three possible outcomes (1) Adjusted
  resource rent is entirely attributed to income
  (2) Adjusted resource rent is split between
  income and depletion or (3) Adjusted resource
  rent is entirely attributed to depletion.

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Growth in renewable natural resources an
addition to output?

• As with non-renewables, appearances of renewable
  natural resources must be reflected on the
  balance sheet but how should they get there?
• Appearance must take form of an output or an
  other volume change.
• SNA says uncontrolled natural growth of
  renewables is not economic production.
• However, SNA does treat cultivated (renewable)
  assets as economic production.

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Growth in renewable natural resources an
addition to output?

• Much natural growth of renewables not subject to
  direct ownership and control.
• But human intervention directly affects growth /
  exploitation of renewables. e.g. setting fishing
  quotas based on sustainable harvest levels.
• In this sense, it can be argued that natural
  growth in renewables is often strongly influenced
  by human input, even if it is not subject to
  direct ownership and control.

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Growth in renewable natural resources an
addition to output?

• Cultivated resources such as fish in fish farms
  exhibit a degree of certainty that the owner will
  generate output and income from natural growth.
• Fish in the open sea do not exhibit the same
  certainty, although there is often a reasonable
  expectation that the natural growth will
  eventually be harvested.
• The degree of certainty will undoubtedly vary
  across different resources and locations.

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Growth in renewable natural resources an
addition to output?

• Treating the growth of renewables as a form of
  output ensures symmetry of recording resource
  additions and removals.
• However, recording uncontrolled growth of
  renewables as output presents practical
  difficulties.
• e.g. fish stocks in the open sea are mobile and
  its possible that stock growth within
  territorial waters of one country may be
  harvested by another. Why increase the
  environmentally-adjusted GDP of one nation, if
  another ultimately harvests the stock?

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Applying option C1

• Option C1 charges extraction of natural
  resources against income, giving rise to a
  depletion-adjusted operating surplus.
• It does not consider additions to stocks of
  natural resources (for example discoveries of
  mineral deposits) to be a productive activity,
  instead it records them in the other changes in
  volume of assets account.
• For non-renewables, this aligns with the London
  Group position described earlier.

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Applying option C1

• However under option C1, additions to renewables
  (e.g. natural growth in forests and fish stocks)
  are also excluded from output leading to an
  inappropriate measure of a depletion-adjusted
  operating surplus.
• By excluding growth of renewables, using option
  C1 could result in a large depletion adjustment
  to operating surplus - even where the stock of
  the renewable asset is increasing.

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Applying option C2

• Option C2 records both extraction and additions
  (e.g. natural growth, discoveries and
  reappraisals) against output and income.
• For non-renewables, this implies that
  reappraisals and discoveries are a productive
  activity contrary to the London Group outcome.

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Applying option C2

• However, option C2 is appropriate for
  renewables.
• In context of SEEA, additions to renewables,
  such as regrowth of forests and fish stocks, can
  be considered an addition to output.
• Harvest of renewables needs to be offset by any
  net natural growth in order to derive an
  appropriate depletion-adjusted operating surplus.

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Example 1 Fish Stocks a renewable natural
resource

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Example 1 Fish Stocks a renewable natural
resource

• Option C1 would record a depletion value of 30
  against income. Natural growth of 20 and
  natural mortality of 10 would be recorded in the
  other changes in volume of assets account.
• This implies a depletion adjustment to operating
  surplus of 30.
• unless net natural growth is included in output,
  this would overstate the depletion impact on
  operating surplus derived from renewables.

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Example 1 Fish Stocks a renewable natural
resource

• Option C2 would record net natural growth of
  10, and a depletion charge of 30.
• SEEA depletion-adjusted operating surplus would
  be 20 lower than SNA operating surplus.
• in effect, the net decline in fish stock value
  is charged against operating surplus.

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Example 2 Mineral deposits a non-renewable
natural resource
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Example 2 Mineral deposits a non-renewable
natural resource

• Option C1 would record a depletion value of 30
  against income, whilst recording discoveries (5)
  and reappraisals (5) in the other changes in
  volume of assets account.
• This implies a depletion adjustment to operating
  surplus of 30
• Because there is no production of mineral
  resources, this suggests an appropriate depletion
  impact on operating surplus derived from
  renewables.

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Example 2 Mineral deposits a non-renewable
natural resource

• Option C2 would record a depletion charge of
  30, and discoveries (5) and reappraisals (5)
  would be added to output and income.
• This implies that discoveries and reappraisals
  are outputs of production.

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Proposing a fourth option

• Option C4 considers separately the cases of
  renewable and non-renewable natural resources.

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Proposing a fourth option

• Option C4 considers separately the cases of
  renewable and non-renewable natural resources.
  For non-renewable natural resources the
  consequences of extraction are recorded in the
  extended generation of income account leading to
  a depletion-adjusted operating surplus, but
  corresponding increases in these resources are
  shown in the other changes in volume of assets
  account.

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Proposing a fourth option

• Option C4 considers separately the cases of
  renewable and non-renewable natural resources.
• For renewable natural resources, both the
  consequences of extraction and net natural growth
  are recorded in the extended generation of income
  account leading to a depletion-adjusted operating
  surplus.

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Proposing a fourth option

• Option C4 considers separately the cases of
  renewable and non-renewable natural resources.
  For non-renewable natural resources the
  consequences of extraction are recorded in the
  extended generation of income account leading to
  a depletion-adjusted operating surplus, but
  corresponding increases in these resources are
  shown in the other changes in volume of assets
  account. For renewable natural resources, both
  the consequences of extraction and net natural
  growth are recorded in the extended generation of
  income account leading to a depletion-adjusted
  operating surplus.

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Applying option C4

• Revisiting the earlier examples, option C4 leads
  to an appropriate outcome in each instance.
• In example 1 (Fish Stocks), C4 would add the net
  natural growth to income, which would in turn be
  offset by economic depletion (harvest).
• In example 2 (Mineral deposits), C4 would charge
  the economic depletion (extraction) against
  output and income. The value of discoveries and
  reappraisals would be recorded in the other
  changes in volume of assets account.

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Conclusions

• SEEA proposes three options (C1, C2, C3) for
  recording changes to the stock of environmental
  assets.
• Option C1 is appropriate for non-renewables, but
  presents issues in respect of renewables where
  stock can experience natural growth.
• Option C2 accounts for natural growth of
  renewables, but inappropriately records
  discoveries of mineral and energy resources as
  produced assets.

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Conclusions

• Option C3 has been excluded on the basis of
  previous London Group outcomes which extinguished
  the concept of a developed natural asset.
• Option C4 overcomes the limitations of the
  existing options by considering the treatment of
  renewable and non-renewable natural resources
  separately.

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Questions

• Do members agree that London Groups earlier
• rejection of option B3 effectively removes option
  
• C3 as a viable option?
• Do members agree that SEEA should, in principle,
• view net natural growth in renewable natural
• resources as part of produced output?
• Do members agree that option C4 is an
• appropriate alternative that overcomes the
• limitations of the existing options?