Broader measures of the balance sheet are useful to consider when thinking about fiscal sustainability. However, under the national accounts framework even the broadest measures fail to recognise natural assets – the very assets affected by climate change. The box discussed the frameworks under which the ONS produces the environmental and natural capital accounts, and which bodies are working to address the gaps in these frameworks. The box also discussed key messages from the Dasgupta Review and Treasury’s response.
As discussed in Chapter 4, there are clear benefits from taking a wider view of the public sector balance sheet of assets and liabilities when thinking about long-term fiscal sustainability – broader measures like public sector net worth provide a more complete picture than narrow ones like net debt. But even the broadest of these measures fail to recognise natural assets – the very assets affected by climate change – and therefore the costs associated with their depletion.
Asset coverage in economic statistics and commercial accounting is typically limited to those from which economic or production value can be drawn, and where ownership rights can be assigned. This means a significant proportion of natural capital (such as air, oceans) is excluded from balance sheet metrics, while their depletion is also excluded from measures of economic flows such as GDP.
Recognising this, the ONS publishes the UK Environmental Accounts and the UK Natural Capital Accounts in addition to the National Accounts on which GDP is based. Both are produced in accordance with the UN’s System of Environmental Economic Accounts (SEEA),a which encompasses a broader asset boundary in physical terms (such as air emissions and water) than the System of National Accounts (SNA), but are recognised and valued in the same manner as the SNA.
These frameworks and statistics provide a building block for developing economic accounting that considers the impacts of climate change. For example, the Environmental Accounts allow for the assessment of economic activities and household consumption in generating emissions or tracking government expenditure (and taxes) related to mitigation or prevention activities. The Natural Capital Accounts are based on the experimental SEEA Ecosystem Accounting framework, which although still fully aligned with SNA, is more loosely connected to it than the Environmental Accounts.
While the central framework for Environmental Accounts looks at environmental assets as individual resources (such as timber, water, soil), the ecosystem framework for Natural Capital Accounts considers them within ecosystems. Therefore the scope of the latter covers those services that contribute to the economic benefits measured in the National Accounts as well as others not accounted for but that relate to the general functioning of ecosystems (measuring ecosystem conditions, contributions made to society and wellbeing, as well as ecosystem asset stocks), which addresses the overarching relationship between the economy, society, the environment, wellbeing and social progress.
Another building block in the recognition of national capital was provided in the Treasury’s 2021 review of the economics of biodiversity, led by Professor Sir Partha Dasgupta.b His review concluded that “nations need to adopt a system of economic accounts that records an inclusive measure of their wealth”, where ‘inclusive wealth’ comprises produced, human, and natural capital. Its conclusions were echoed by calls from G7 finance ministers and central bank governors for improved corporate financial reporting standards to capture the costs and risks associated with climate change.c International accounting bodies such as the Financial Stability Board, IFRS and IPSAS are working on relevant standards for the public and private sector entities, while bodies such as the UN and OECD are working on standards for national statistics.
In its response to the Dasgupta Review, the Government committed to “delivering a ‘nature positive’ future, in which we leave the environment in a better state than we found it, and ensure economic and financial decision-making is geared towards delivering that.”d In relation to the latter, the Treasury and ONS committed to improve their natural capital estimates and examine the feasibility of developing expanded public sector asset measures, accounting for environmental assets that yield services (such as carbon sequestration). The Government has also committed to integrating environmental principles into policy making through a number of initiatives including regulatory evaluation, cost-benefit analysis, and financing decisions.e
Although broader accounting standards are not yet available, some countries are making progress in capturing environmental impacts in their policy making processes. Several years ago, New Zealand began publishing a ‘Wellbeing Budget’ and a Living Standards Framework, which is based on a concept of four capitals: natural capital; human capital; social capital; and financial and physical capital. Their Budget is presented with a focus on the contribution that budget policies make to each of these capitals.f
This box was originally published in Fiscal risks report – July 2021