Forest Resources in National Accounting

A proper system of economic accounts for forestry should provide policy-makers with information that gives a more complete picture of the net benefits derived from forests than is the case at present. Such information should include wood as well as non-wood products; goods as well as services or functions; and benefits from marketed as well as non-marketed goods and services. While developing the system it may be kept in mind that a clear boundary line between forestry practices and agricultural or horticultural practices, although essential for developing an accounting framework, remains very difficult in actual practice. A lot more depends on data collection systems in specific countries. However, while developing the system, a clear mission should be that the total value of forests includes agro and social forestry values, which should be adequately credited to the forest sector. This will produce a far more comprehensive perspective for taking account of varying practices followed in different countries.

The starting point for a forest sector SEEA is the treatment of forest activities in SNA. Without a firm understanding of how forests are treated in the broader accounting aggregates of SNA, it is truly impossible to develop a reliable forest sector SEEA. This understanding is founded in the physical and monetized stocks and flows for forest activities in SNA.

The purpose of this chapter is to outline what information is already included in the conventional SNA and how it may be interpreted in terms of policy making. Furthermore, it is important to review the information on SNA to better understand how to integrate economic and environmental accounts into SNA. Discussion of the integration of satellite accounts is postponed until the next chapter.

The SNA includes both flows of goods and services and stocks of assets used in the production of goods and services. The objective of the national accounts is not only to measure the flows of goods and goods and services resulting from capital investment and consumption (GDP and NDP) but also the accumulation/depletion of capital stock including natural capital. By utilizing ISIC (industry codes) and CPC (product codes) the rows and columns of Table 3 can be used to identify the different products produced by various industries and the uses of these products in final consumption. The asset accounts for economic produced and non-produced assets (see box 1 for SNA classifications of assets) are also compiled by industry (ISIC) and describe the stocks at the beginning and end of the accounting period and all changes therein.

Table 3 SNA/SEEA: Flow and Stock Accounts with Environmental Assets

Source: Draft Integrated Environmental and Economic Accounting - An Operational Manual. UNSD. Feb. 1998.

Box 1 Classification of Assets in the SNA

It is possible to use the supply and use table to identify forest sector components of value. In other words, it is possible to identify sector output, intermediate consumption, compensation of employees, taxes and subsidies. The forest sector includes timber, logging, growing of standing timber in plantations (produced assets) forestry and logging services activities, gathering of wild growing forest materials, such as cork, resins, lichens, etc. Note that gathering of mushrooms, berries and fuelwood, for sale and own-consumption is considered as output of the agriculture industry, not the timber industry. In chapter 3, we will discuss disaggregation of activities related to forests but included in other industries (i.e. agriculture, mining, etc.).

The asset accounts for produced assets include the stock of man-made capital at the beginning and end of the reference period and all changes therein. The stock of produced capital for the forestry industry consists of machinery used for planting, thinning and transporting logs and the value of the stock of timber in plantations. Changes in stocks include capital formation, consumption of fixed capital and other changes in volume of assets and revaluation. Capital formation includes the investments made by the forestry industry in machinery as well as all costs of reforestation and afforestation of produced and a non- produced forests and natural growth of forest. Other changes in volume include reductions and additions to the volume of the stock caused by economic decisions (i.e. changes in classification of timber from non-produced to produced asset), or natural causes (i.e. forest fires, diseases, etc.) or other causes. Reevaluation includes changes in prices of the assets. For timber stocks the change is usually calculated as a balancing item and therefore might include statistical discrepancies as well.

Non-produced assets include land and natural "economic" forests or forests that are likely to be exploited. However, it is difficult to identify forest land in the SNA, as no explicit reference is made to land cover in the land classification. With regard to non-cultivated forests, the asset accounts include the value of the stock of forest at the beginning and end of the accounting period and all changes therein. The major difference between the asset accounts for cultivated and non-cultivated forests is revealed by the different ways that natural growth is reported. In the case of cultivated forests, natural growth is considered a process of production and it is, therefore treated as output, in the production accounts, and capital formation, in the capital account of the forestry industry. For non-cultivated forests, natural growth is considered as a result of a natural process and therefore recorded in the other changes in volume accounts, outside the production accounts. In practice, it might be difficult to distinguish cultivated from non-cultivated forests, because there is typically degrees of human intervention in either. instance. The question is how much input is needed to classify the forest as produced or non-produced?

According to SNA, "certain natural processes may or may not be counted as production depending upon the circumstances in which they occur. A necessary condition for an activity to be treated as productive is that it must be carried out under the instigation, control and responsibility of some institutional unit that exercises ownership rights over whatever is produced." Thus, it should be noted that the growth of crops, trees, or livestock that is organized, managed and controlled by institutional units constitutes a process of production in an economic sense. Growth is not to be construed as a purely natural process, which lies outside the production boundary. However, an accounting decision must be made concerning those forests, which are not under economic use in order to clarify what portion of total forest growth is "produced".

The measurement of forest output is complicated by the fact that the process of production may extend over many years. Thus standing timber has to be treated as work-in-progress -- that is, as output which is not yet sufficiently processed to be in a form which is ready to be marketed. When trees are felled, the process of production is completed and the work-in-progress is transformed into inventories of finished products ready for sale or other use. Conceptually, therefore, timber production can be measured in exactly the same way as other types of production that require long production periods. Output should be recorded as being produced continuously over the entire period of production and not simply at the moment of time when the process is completed.

In actual forest activities, output of natural and plantation forests may include all the related commodities and amenities such as food, fuel, fodder, shelter, fibre, medicines and recreation. These products and activities may be monetized but are also reported in physical terms such as the number of hectares of forests or volume of standing timber. Also included in the idea of forest activities are royalties collected, taxes, the expenditure incurred on maintenance and research, and changes in aggregates such as the rates of deforestation. This broad idea of forests and forest activities is far more inclusive than the traditional SNA forest production account. Thus standard production accounts may not meet the need of policy-makers. The SEAFA (system of economic accounting for agriculture), therefore, recommends accounts for the forestry sector as a whole as well as activity accounts for different forests classified according to their management aspects. The goods and services account is compiled only for the products of forestry as a whole and, the capital account in the system is intended to cover the forestry sector as a whole.

Asset Boundaries, Produced and Non-produced Forest Assets

The SNA distinguishes between produced (human-made) and non-produced (natural) assets. Based on SNA terminology, all produced assets are "economic" and are included in the economic accounting system. A qualification is made regarding non-produced assets which is made clear from the quotation below.

Effective ownership is the requirement for a natural resource to be included as an economic asset and not the fact that economic benefits might be derived from the asset. For example, open access high seas fisheries are an economic asset if there is the potential for a nation to claim and enforce exclusive access rights. This point is further highlighted in SNA 1.26 in reference to defining the asset boundary:

"Balance sheets are compiled for institutional units, or sectors, and record the values of the assets they own or the liabilities they have incurred. Assets as defined in the System are entities that must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time. Financial assets and fixed assets, such as machinery, equipment and structures which have themselves been produced as outputs in the past, are clearly covered by this definition. However, the ownership criterion is important for determining which naturally occurring--i.e. Non-produced assets are included in the System. Naturally occurring assets such as land, mineral deposits, fuel reserves, uncultivated forests or other vegetation and wild animals are included in the balance sheets provided that institutional units are exercising effective ownership rights over them--that is, are actually in a position to be able to benefit from them. Assets need not be privately owned and could be owned by government units exercising ownership rights on behalf of entire communities. Thus, many environmental assets are included within the System. Assets that are not included are those such as the atmosphere or open seas, over which no ownership rights can be exercised, or mineral or fuel deposits that have not been discovered or that are unworkable--i.e. incapable of bringing any benefits to their owners, given the technology and relative prices existing at the time."

Other Changes in the Volume of Assets Account

Economic assets are entities over which ownership rights are enforced by institutional units and from which economic benefits may be derived by their owners. Naturally occurring resources that qualify as economic assets are those that are under the direct control, responsibility and management of institutional units. Economic appearance occurs when an asset becomes classified as economic.

For other natural assets, the first substantial market appearance, generally involving commercial exploitation, is the reference point for recording in this account. For virgin forests, gathering firewood is not commercial exploitation, but large-scale harvesting of a virgin forest for timber is, and brings the forest into the asset boundary.

The natural growth of non-cultivated biological resources -- natural forests, fishstocks, etc. -- may take various forms. A stand of natural timber may grow, or fish in the estuaries may become more numerous. Although these resources are economic assets, growth of this kind is not under the direct control, responsibility and manage ment of an institutional unit and thus is not production. The increment in the asset must then be regarded as an economic appearance, and it is recorded in the other changes in the volume of assets account.

In principle, natural growth should be recorded gross, and the depletion of these resources should be recorded as an economic disappearance. This recording would be consistent with the separate recording of acquisitions and disposals described in the capital account. In practice, however, many countries will record natural growth net because the physical measures that are likely to be the only basis available for the recording are, in effect, net measures. These measures may be used in conjunction with a market price for a unit of the asset to estimate the value of the volume change to be recorded.

The depletion of natural deposits covers the reduction in the value of deposits of subsoil assets as a result of the physical removal and using up of the assets. In principle, the depletion of natural forests and other non-cultivated biological resources included in the asset boundary as a result of harvesting, forest clearance, or other use should be included here.

Many methods have been put forward for including environmental accounting in the framework of national accounts. Such methods have different levels of consistency with the SNA. The SEEA supplements the SNA in the following ways.

The SEEA separately identifies, in the supply-use table, activities related to the forests that not recorded in the SNA forestry industry and the associated expenditures related to forest protection and management. The SEEA, as a result, describes a far more realistic array of forest sector net benefits.

The SEEA expands the asset accounts beyond "economic" (in the SNA sense of the term) to include "environmental" forests. All forests provide environmental services. Some of the forest are primarily used for economic purposes (i.e. timber and non-timber productions, etc.) and are labeled "economic". "Environmental forests", on the other hand, includes forests whose main function is providing environmental services.

The SEEA introduces sectoral impacts, in physical and monetary terms, on natural (economic and environmental) forests caused by production and consumption activities of industries, households and the government in the production and asset accounts. This allows tracking of such phenomena as "acid rain".

By linking physical accounts with monetary environmental accounts and balance sheets, the SEEA is an integrated extension of the SNA so there is accounting consistency.

The SEEA may include elaborated environmentally adjusted indicators for deducting the costs of forest depletion or degradation from NDP and capital formation.

As mentioned earlier, several non-timber products are recorded in industries different from the forestry industry. Activities related to the production of non-timber products in the forest can be separately identified to assess the contribution of forest to the economy.

Expenditures by the forest industry are likely aimed at increasing or maintaining timber production. In most countries, the government is the prime actor in environmental protection, but industries and to a lesser extent households have been prompted more and more to respond directly to the environmental impacts they cause, according to the polluter/user pays principle.

Also mentioned previously, asset accounts for produced and non-produced economic forests are already included in the SNA asset boundary. The SEEA also allows for the inclusion of "environmental" forests within its asset boundaries, to provide a better understanding of the national wealth and conservation of the forest. The lack of understanding about the details of ecosystems’ functions makes the valuation of the "environmental" forests very controversial. The SEEA, therefore, focuses on the compilation of the asset accounts for "environmental". forests in physical terms only. Valuation of depletion and degradation of "environmental" forest is, however, possible through maintenance costing, that is the cost that would have been incurred if the environment had not been used to impair its future uses.

Environmental impacts (depletion and degradation) on forests are valued and shifted to the production accounts, as opposed to the SNA that reports them in other changes in volume, outside the production accounts. Such costs are allocated to the industries and consumers causing the environmental depletion and degradation. Depletion and degradation caused by households is treated as cost of household production activities, identified as a separate industry in the SEEA. Environmental degradation caused by government is recorded as cost of the government industry. In consistency with the conventional accounts, changes in environmental assets that cannot be attributed to production and consumption, such as natural disasters and natural growth, are recorded in "other changes in volume of assets".

The costs of depletion and degradation of the forests can be regarded as consumption of natural capital. This suggests that asset use should be subtracted, along with the consumption of produced capital, from the gross value added of the pollution causing industry. This adjustment from GDP, and GFCF (gross fixed capital formation) would yield Environmentally-adjusted Net Value Added (EVA), Environmentally adjusted net Domestic Product (EDP) and Environmentally-adjusted net Capital Formation (ECF) figures. Calculations have also been made of the counterpart of ECF, "genuine" or net saving (World Bank 1995). Environmentally adjusted indicators would give more realistic information on the overall performance of the economy and its production and consumption patterns.

Environmentally adjusted indicators are calculated on the basis of sustainability criteria. Only permanent losses of the income generating capacity of the forests from their uses are considered in the construction of environmentally adjusted indicators. Depletion of timber, for example, is defined as the part of logging that exceeds sustainable wealth accumulation. Each nation must develop a set of expectations about the acceptable rates of use in terms of long term wealth accumulation. This would set a boundary on rates of accumulation/depletion. Similarly, for forest asset degradation, emissions, which have negative wealth effects, are termed as unsustainable emissions.

One point that should be noted is that monetary figures on depletion depend on two quantities: the physical quantity of the resource use, and the resource’s market price. Market prices can change markedly from year to year, for reasons unrelated to physical scarcity. Therefore it is quite possible; when the physical use of a resource has gone up but its price has gone down, that the costs of depletion would be shown as decreasing despite the fact that more resource has been extracted. Similarly, degradation costs might be decreasing, despite increased emissions. This is due to reduced maintenance costs as a result of improved technology at lower costs. Physical data are an integral part of the accounts and should always be reported to avoid misinterpreting the results of the accounts.

Another point that has been raised relates the inclusion of degradation costs in the production accounts. Conventional economists and national accountants argue that, contrary to depletion, where an allowance, for running down the resource stocks, is included in the business accounts, degradation costs have not been internalized. Maintenance costs can be seen as weights for the aggregation of the environmental impacts from the economy. This would provide an indication of which costs should have been internalized by the activity that caused. them (Bartelmus 1998). European countries have, instead, opted for aggregating the impacts in physical terms. Pollutants emitted are allocated to different environmental "themes", greenhouse gas, acidification, ozone layer depletion, eutrophication and waste. The allocation of the pollutants to the "themes" consists of a weighted average of the pollutants with weights proportional to the potential relative stress of each substance on the environment.

A detailed breakdown of environmentally adjusted indicators by economic sectors may play an important role in policy making. These indicators could portray structural distortions of the economy from under-priced use of environmental resources and suggest initial estimates for the appropriate level of environmental cost internalization (i.e. taxes and subsidies, etc.) into the budgets of households and enterprises. Given the inefficiencies of command-and-control measures in environmental protection and natural resource conservation, the application of market instruments has been greatly advocated. Economic instruments are usually applied to those who can be held responsible for natural resource depletion and environmental degradation, according to the user/polluter-pays principle.

Because it is anticipated that some economic goods and activities, which have no observable price, may never the less be valued in the SEEA, it is important to use the valuation approach of SNA as a starting point. Direct impacts of economic activities on the environment are accounted for through market based valuation which relies on readily observable prices. An alternative valuation method, consistent with the SNA, which attempts to capture both direct and indirect impacts, is maintenance cost. Each valuation method yields an imputed cost of "protecting" the forest. Quality aspects which, could be a result of economic activities from previous accounting periods or from other countries within the same or previous periods are not directly valued. Aspects of environmental activities that affect the quality of the forests are often brought about by logging (loss of habitat for biodiversity, loss of watershed protection, etc.) or by airborne industrial and consumer emissions that cause acidification. Also, natural and man-caused forest fires, insect infestations, windstorms and/or plant diseases can bring about significant changes. Forest degradation is reflected in the SNA (in monetary terms) only in so far as it reflects direct impacts of economic activities or through maintenance cost valuation.

In instances, where no market transaction is available, (e.g. household consumption of self-produced goods) the convention applies to value these goods at the prices which would have been obtained in the market had the goods been sold. This is a straightforward valuation method. For example, the value of household collected and consumed wild fruit would be the market price of the same or highly similar products.

Imputed Environmental Costs

The SEEA offers different concepts from SNA for the calculation of environmental costs. Its focus is on the cost-caused concept or the economic activity that causes the environmental cost. Applied to the use of forest resources, two categories of environmental costs are distinguished: depletion costs and degradation costs. Depletion costs refer to the quantitative depletion of the stock by the economic activity. Degradation of the resource, on the other hand, reflects the qualitative deterioration of the natural environment by the economic activity.

SEEA proposes to estimate degradation costs either at the level of the causing economic activity or at the level of those industries and households that need to bear such costs. In the first case, imputed costs would show an estimate of the costs incurred in preventing or mitigating the deterioration and thus of maintaining the environment (i.e. maintenance cost valuation concept). In the second case, actual costs may be estimated by calculating the loss in production of the affected industries and, in the case of households, their ‘willingness to pay’ for not bearing the degradation.

Both the cost-caused and cost-borne concepts create conceptual and practical estimation difficulties. The cost caused approach may result in significantly underestimating the ‘real’ welfare cost associated with environmental degradation because the prevention or mitigation costs could be much less than the costs borne.

The cost borne concept, on the other hand, assumes that all productivity losses can be estimated into the future and assigned to a particular economic activity. Some of these losses may be borne by economic units other than those of the country where the degrading (or depleting) activity originates.

Household welfare losses due to environmental degradation are normally estimated using contingent valuation methods (willingness-to-pay approach). There are various problems associated with this valuation method including the observation that the stated willingness-to-pay may be higher than ‘true’ willingness (free-rider problem) and the fact that the income of a person will place a constraint on her/his ability and, thus, willingness to pay. The latter is highly significant because poorer people are often in conditions where they need to shoulder the brunt of environmental degradation (e.g. location of slums in the most polluted, noisiest and disaster-prone areas).