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No. 116: Water Resource Accounts and Accounts for the Quantity and Value of Ecosystem Services connected with the Danish Water Resources. Methods and Requirements

Flemming Møller, Berit Hasler, Ole Gravgård Pedersen, Marianne Zandersen & Louise Martinsen, 2014. Water Resource Accounts and Accounts for the Quantity and Value of Ecosystem Services connected with the Danish Water Resources. Methods and Requirements. Aarhus University, DCE – Danish Centre for Environment and Energy, 111 pp. Scientific Report from DCE – Danish Centre for Environment and Energy No. 116 http://dce2.au.dk/pub/SR116.pdf

Summary

This report describes how a national account based water resource accounting system can be structured and discusses the possibilities of making Danish water resource accounts. The possibilities of making an account of the value of water resource related ecosystem services are also discussed. The approach described in the report is based on UN’s guidelines for a national account based water resource accounting system, cf. System of Environmental Economic Accounting for Water, United Nations (2012a).

For the purpose of the present study the water resource is defined to include groundwater and surface water but not marine waters. This is in accordance with previous work on water resource accounts, which have mainly focused on groundwater and surface water. Marine waters are very different from both groundwater and surface water and are best handled within a separate accounting system.

The national account based water resource accounting system includes five separate but interconnected accounts:

  • Annual water flows – annually extracted, consumed and discharged quantities of water
  • Annual stocks – quantities of groundwater and surface water available
  • Annual emissions of pollutants to groundwater and surface water
  • Annual account of water quality and ecological status of different parts of the water resource
  • Annual value of water resource related ecosystem services and the value of the total water resource.

A water resource accounting system can also include an account of the economic costs of extraction, treatment and distribution of water. The economic account indicates who pays the costs and specifies the taxes and subsidies related to the use of water. However, the economic account is not considered in this report; instead focus is on water amounts, water quality, ecological status and water related ecosystem services.

The five accounts are linked to each other. Supply, consumption and discharge of water which are stated in the water flow account determine the amount of water available (i.e. the stock account) and along with annual emissions (i.e. the emission account) the quantity of water influence water quality and the ecological status of the water resource. Finally, ecological status together with total quantity and type of use influence the provision and value of water resource related ecosystem services.

To analyse the relations between accounts it is important that all accounts are constructed similarly in terms of the breakdown of industries, demand and geographical areas into categories. As far as possible, the breakdown of emissions into different pollutant categories should correspond to the categorization used in relation to the water quality indicators and indicators of ecological status that are used in the water quality account. Also the breakdown of demand categories, emissions and water quality indicators should be closely related to the different ecosystem services. By using the same division of industries and demand categories as used in the traditional national accounts it is ensured that the water resource accounts - including the account of the value of ecosystem services – can be integrated with the national accounts. This integration of water resource accounts with traditional national accounts is a prerequisite for being able to make environmental macroeconomic analyses.

The different water resource accounts are discussed in detail in Chapter 3. In Section 3.1 water quantity accounts are discussed and it is shown how tables for water flows and water stocks can be structured, respectively. In Section 3.2 it is described how a general accounting table for emissions to water can be structured. The table can be made for every pollutant that is regarded as relevant in relation to water quality and ecological status. The construction of an accounting table for water quality and ecological status is discussed in section 3.3. This table can be structured in different ways depending on the choice of indicators for water quality and ecological status and on the geographical division used in the assessment. Finally, in Section 3.4 different water resource related ecosystem services are identified and it is discussed how the value of the services can be incorporated in a table specifying supply and demand of the services and a table specifying the value of the water resource capital, respectively.

Water resource related ecosystem services include services within the following three main categories of services - cf. the CICES classification in European Commission (2013):

  • Provisioning services
  • Regulating services
  • Cultural services

Besides these services the CICES classification also includes supporting services. Supporting services are fundamental ecological processes, and they are a precondition for ecosystems to be able to supply the three services listed above. Although supporting services are fundamental for the functioning of ecosystems they can be disregarded in an accounting context where focus is on the value of ecosystem services to the human society. Hence, the value of these services is included in the value of provisioning, regulating and cultural services.

The provisioning services of the water resource include the extraction and consumption of groundwater as well as surface water by industries and households. The services include both the extraction of drinking water and the extraction of water for process purposes – e.g. irrigation.

The regulating services of the water resource are related to the emissions of pollutants to the water environment. Hence, to a certain degree, the water resource is capable of breaking down and assimilate pollutants. This represents a valuable service to the human society because it implies that human beings through economic activities within certain limits can pollute the water resource without inflicting welfare losses on society due to deterioration of water quality.

The cultural services of the water resource relates to the possibilities that the water resource provides households in relation to different recreational activities such as angling, hunting, swimming and sailing. In addition to this the possibility of using the water resource for scientific purposes and education also represent cultural services.

The annual value of the different services can be stated in an account where it is also stated how use of the different services is distributed across specific industries and households. The capital value of the water resource and the changes in this value can be calculated as the present value of the present and expected future services. This capital value represents a part of total nature capital and it is stated in a capital account.

Both the annual and capital accounts of the value of ecosystem services presuppose that the different services are valued. In Chapter 4 the principles and methods of economic valuation are described, and the possibilities of making accounts of ecosystem services in practice are discussed.

The provisioning services of the water resource have a direct use value, and in many cases these services can be valued on the basis of market prices associated with water use. In the cases where no market prices exist alternative valuation approaches can be adopted. Thus, the average of the existing market water prices can be used as the accounting price of water or it can be calculated on the basis of the costs of extracting water if data is available. Finally, it is possible to value the provisioning services of water on the basis of the resource rent that is generated by the use of water e.g. in the production of agricultural products.

Regulating services may give rise to indirect use value in the sense that production costs in some industries are reduced because pollutants can be discharged to the water resource without degrading water quality and ecological status of the resource. In the same way, the regulating services of the water resource may reduce households’ expenses for water treatment. The saved costs of industries and households can be used as basis for valuation of regulating services.

Finally, cultural services represent use value especially for households. The value can be estimated by using a number of different direct and indirect valuation methods that have been developed. However, it is a problem that many of the methods are developed for the purpose of valuation in relation to well-defined projects. It is therefore questionable if the results from such studies are suitable for use in an accounting context.

The values of the different annual ecosystem services make up the basis for the annual accounts stating the value of services supplied by the water resource and demanded by industries and households. The values can also be used to calculate the capital value of the water resource. The capital value is calculated as the present value of present and expected future annual services. However, the present value of the annual flows of ecosystem services only represents the direct and indirect use value of the water resource. Hence, in order to calculate the total capital value of the water resource the option value and the non-use value of the resource must be added. Option and non-use values, however, are difficult to estimate with the existing valuation methods.

The five accounts of the total water resource accounting system referred to above can be used as basis for different kind of analyses which are discussed in Chapter 5. The different analyses include:

  • Environmental indicator analysis
  • Ex post analysis
  • Input output based ex ante scenario projection
  • Generation of macroeconomic water resource models, consequential analysis and forecasts
  • Evaluation of sustainability on the basis of Genuine Saving

The water resource accounting system provides information that can be used in an environmental indicator context. The information on the distribution of water use across economic sectors can be linked with information about production in the same sectors from the national accounts and in this way it is possible to evaluate e.g. how the effectiveness with regard to water consumption has evolved across sectors. Similar analyses can be made for emissions of different pollutants to the water resource. The information in the water quality accounts in itself indicates how the state of the water resource evolves. Finally, the values in the accounts of ecosystem services indicate how the state of the water resource in general evolves. If the value of the annual ecosystem services increases and the capital value of the water resource is non-decreasing this means that the state of the water resource in general has improved.

Ex post analyses can be used to examine the causes of changes in emissions to water, the quality of the water resource and its ecological status and the value of the water resource related ecosystem services. If the information from the water resource accounting system is linked with economic information from national accounts it is possible to determine the extent to which the changes in the use and state of the water resource are caused by changes in production structure, consumption structure and/or emissions per produced unit. Furthermore by use of economic models it may be possible to determine to which degree the changes in structural conditions are caused by economic policy and other economic changes, respectively.

Input output based scenario projection analyses are based on the input output accounts of the national accounting system. On the basis of these accounts the direct and indirect consequences for production in all industries of a change in consumption or investments can be estimated. The production changes can be linked with the emissions accounts of the water resource accounting system to assess the consequences for emissions. However, to estimate the subsequent consequences in relation to water quality, ecological status and value of ecosystem services specific biological models are needed. The simple input output based emission projection analyses can be developed and improved by estimating proper macroeconomic water resource models. The linking of the water resource accounting system with national accounts forms a strong basis for developing such models.

Finally, information about the value of ecosystem services in the water resource accounting system can be used to calculate the genuine saving of the society. Genuine saving is an economic sustainability indicator. It is calculated as NDP + value of regulating services not included in value added + value of cultural services – value of defensive measures – depreciation of nature capital – (value of private and collective consumption and consumption of cultural services).

In the concluding chapter the possibilities of making Danish water resource accounts are discussed. In this connection the availability of data is also discussed.

There are two important data sources relevant for estimating the annually extracted and consumed quantities of water, namely the JUPITER data base from GEUS and DANVA’s data base, cf. Section 6.1. Information on the quantities of water discharged to the water resource from water treatment plants and other point sources is collected as part of the NOVANA program and is available in the PULS data base from the Nature Agency. In the period 1995 – 2005 these data sources have been used by Statistics Denmark to make physical water accounts for Denmark. These accounts are presented in Section 6.5. It should be possible to recommence the publication of these accounts. In this connection, however, it is relevant to consider restructuring the accounts in terms of the underlying economic sector division and a geographical division in order to make the accounts more suitable for the analysis of water resource problems.

The data sources used for assessing annual water flows can also be used to make the annual accounts of the quantity of groundwater and of the changes in groundwater reserves. By contrast, data is not available for making similar status accounts for surface water.

Information about the annual emissions of pollutants to groundwater and surface water is also collected as a part of the NOVANA program and it is published in the PULS data base of the Nature Agency. Information about airborne emissions from foreign countries that influence the Danish water resource is collected and published by HELCOM and OSPAR. Therefore the data basis for making the emission accounts is assessed to be strong - cf. Section 6.2. However, a comprehensive work needs to be done in terms of specifying which pollutants accounts should be made for and in terms of determining the relevant sectoral and geographical levels of the accounts.

It is expected that status accounts of water quality and ecological status for different parts of the water resource can be constructed based on data on ecological status collected as a part of the NOVANA program and data about water quality available in the JUPITER data base - cf. Section 6.3. However, the existing data need to be thoroughly scrutinized in order to decide which data for water quality and ecological status is most appropriate to use in the water resource accounts. Moreover, problems with regard to geographical division of the accounts and division into different water resource types – e.g. lakes, streams, wetlands et cetera – need to be clarified before the accounts can be constructed.

Finally, in Section 6.6 it is concluded that the possibilities of making a complete account of the annual value of water resource related ecosystem services are very small. Thus, information about the size of a number of regulating and cultural services is relatively sparse and the possibilities for valuing the services are limited. In addition a number of methodological problems remain to be solved. Which valuation approach should generally be used – willingness to pay based valuation or cost based valuation? Can results from project related valuation studies be used in an accounting context? These and other problems are discussed in relation to two Danish valuation studies: valuation of cultural services supplied by Odense and Roskilde Fjord and valuation of protection of ground water. It is concluded that currently it is only the provisioning services of the water resource that can be estimated and valued.

In summary, the screening of the data available for constructing a Danish water resource accounting system indicates that except for the ecosystem services accounts the possibilities of making water resource accounts for Denmark within a small number of years are relatively good. The most important challenges seem to be related to determining which economic sector division and geographical division that should be used in the accounts. Hence, the challenge is to identify an aggregation level that is both environmentally relevant and match the possible aggregation levels in the national accounts. With regard to the ecosystem services accounts the time-horizon is likely to be significantly longer as it will take longer time not only to produce the necessary data but also to find a solution of the methodological problems related to the valuation of the services.