Section 2: Ecosystem accounting

Human activity is having large and growing impacts on our natural environment. ¹  Environmental degradation affects the quantity and quality of goods and services provided by ecosystems as a result of impacts on biotic and abiotic elements of ecosystems.

Ecosystems are ecological communities of living species that interact with their environment and function as a unit. For accounting purposes, the concept is generalized, with ecosystems defined as the area where living species interact among themselves and with their environment. ²  Although there is a lot of information on ecosystems and their condition, this information is not comprehensive and some data gaps remain.

The goods and services that ecosystems generate are not well understood and measured, in part because many are taken as gifts from nature. Since they are provided in abundance at no charge by the environment, most ecosystem goods and services (EGS) are not traded in markets and therefore have no explicit market value. For example, while there are markets for timber, wheat and other harvested commodities, there is no market for the air we breathe—it is not traded, has no market value and by implication may be taken for granted.

Building ‘ecosystem accounts’ through the rigorous compilation of ecosystem information within a standardized framework, allows for the measurement of EGS over time and across the country, and is one way to better understand the value of ecosystems and their goods and services.

What is ecosystem accounting?

Ecosystem accounts compile and organize information on ecosystem stocks, including, for example, forests and wetlands. These stocks, also called natural capital assets, generate flows of EGS, which are the second element of ecosystem accounts. Put simply, ecosystem accounts present information about the quantity of ecosystem assets and EGS from which society benefits.

There are certain parallels between ecosystem accounting and business accounting. A country, for example, begins the year with an initial stock of forest area. Over the year, forest area may increase or decrease depending on the balance between additions due to new growth and replanting and removals due to harvesting or natural disturbances such as pests and forest fires. Throughout the year, the forest provides a flow of goods and services that include timber, oxygen, freshwater, wildlife habitat, recreational space and carbon sequestration. An ecosystem account would include measures of these stocks and flows using both physical and monetary terms where possible. It would also include a quality measure to help track changes in the state of the ecosystem.

The development of ecosystem accounts requires that both the stock of ecosystems and the flows of EGS be systematically grouped using consistent concepts and classifications. However, applying these standards is particularly challenging because EGS are the outcomes of complex interdependent processes within and across ecosystems.

Classifying stocks

It is possible to measure the extent, condition or quality of ecosystem assets. In order to do so, stocks of terrestrial ecosystems are classified based on land cover features, divided broadly into forest, grassland and tundra landscapes, while aquatic ecosystems are divided into freshwater and marine. These high level groupings are then subdivided according to local biophysical characteristics, such as soil type, elevation and ruggedness.

Given the advancement of spatial datasets and satellite image technologies, it is now possible to use more detailed land cover and land use information to better delineate stocks of ecosystems and track them over time. However, the resolution of the data source will have implications for the type and scale of analysis that can be performed. The spatial hierarchy and land cover ecosystem units developed as part of the MEGS project are described in detail in Appendix A– Measuring Ecosystem Goods and Services geodatabase.

Classifying flows

The classification of EGS flows has a relatively recent history ³ —efforts in this area include the Millennium Ecosystem Assessment, ⁴  the Economics of Ecosystems and Biodiversity study ⁵  and the still evolving Common International Classification for Ecosystem Services (CICES). ⁶ 

CICES, for example, defines EGS categories and excludes intermediate goods and services ⁷  to avoid overlap and double counting. For this reason, CICES only includes final ecosystem outputs that benefit people. However, many intermediate ecosystem services deserve to be measured and valued. For example, food crops may be considered a final ecosystem good but their growth depends on pollination, water regulation and soil formation. In turn, pollination is dependent on bees having appropriate habitats near farmland where the crops are grown. This complex web of interactions is not clearly shown in a two-dimensional classification of ecosystem services.

For the MEGS project, EGS flows are classified into three broad categories: ⁸ 

1. Provisioning services—the ‘goods’ in EGS—reflect the material and energy provided by ecosystems; for example, timber, fish, or plants that have a particular socio-economic use.
2. Regulating services result from the capacity of ecosystems to regulate climatic, hydrological and bio-chemical cycles, as well as biological processes.
3. Cultural services are generated from the physical setting and location of ecosystems and give rise to emotional, intellectual and symbolic benefits that people obtain from ecosystems through recreation, knowledge development, relaxation, and spiritual reflection.

Ecosystem quality and capacity

Measuring ecosystem quality over time provides information about the state of the environment and is necessary to understand the capacity of ecosystems to provide EGS flows into the future.

Different approaches are used to estimate ecosystem quality since it can be difficult to obtain direct measures of quality and there is no universal best approach. An approach that is suitable to assess quality or health of an ecosystem in an agricultural setting, for example, may not be appropriate for the tundra or an old-growth forest.

Several indicators are available to help assess ecosystem quality. These indicators include measures of ecosystem productivity, the ecological potential of the landscape, various aspects of biodiversity including the status and trends of species, to mention but a few. The MEGS project explored the applicability of several of these indicators, making modifications based on data availability. This report includes experimental indicators covering several aspects of human disturbance of natural landscapes (Section 3.2), ecosystem services potential (Section 3.3), and biomass extraction (Section 3.4).

Other indicators of ecosystem quality focus on measuring outcomes; for example, the quality of water that has gone through natural filtering mechanisms provided by ecosystems. The EGS provided by wetlands are analyzed in this way in section 3.6.

Valuation of ecosystem goods and services

Many goods and services are routinely traded in the economy and have well-defined prices. Markets for labour, food, or consumer goods are all well-established; people have an intuitive understanding of their relative values. By contrast, many EGS, such as water quality regulating services provided by wetlands or forests, are rarely formally bought and sold and have no specific market price. Monetary valuation of EGS can help address this issue by putting the benefits people receive from the environment in terms that allow comparison with other goods and services. ⁹ 

Valuation of EGS is used in a variety of ways. In addition to raising awareness and educating the public on the importance of EGS, valuation is used to help evaluate tradeoffs involved in land development decisions, identify ecosystem conservation and restoration needs, support ecosystem accounting, develop tax policies, and evaluate compensation relating to environmental damage claims.

Numerous methods have been developed to estimate the monetary value of EGS. These methods focus on measuring the benefit or contribution that ecosystems and their functions make to human well-being. The type of policy use will determine the method ¹⁰  and the level of accuracy required. ¹¹  However, valuation is subject to various limitations. ¹²  See Appendix B for more information on valuation methods and their limitations.

EGS valuation analyses often focus on the impact of small, incremental changes in an ecosystem or its services, rather than on overall values. This approach is useful because many policy or development decisions relate to how specific changes will impact human well-being. ¹³  When conducting valuation studies, it is important to consider the relationship between the location and extent of ecosystems and the proximity to human populations that will ultimately benefit from their goods and services. ¹⁴ 

EGS can benefit people in different ways. The values of these different types of benefits can be grouped into ‘use’ and ‘non-use’ categories (Figure 2.1). Use values can be separated into direct use (e.g., resource extraction or recreation); indirect use (e.g., carbon sequestration and protection against natural hazards); and option value, which relates to the availability of EGS for direct and indirect use in the future. Non-use values reflect that people are made better off simply by knowing that natural environments and their elements exist (existence value) or that the EGS that flow from them will be available for future generations (bequest value). Non-use values, along with option value, are the least tangible of all EGS values. ¹⁵  Collectively, these different use and non-use values are referred to as ‘Total Economic Value’ (TEV) (Figure 2.1).

Figure 2.1: 'Total Economic Value' framework

TEV is most useful as a conceptual tool that allows decision-makers to consider a potentially wide range of costs or values when assessing a given policy option. Despite the name however, not all of the values suggested by the TEV framework can or should be added together. ¹⁶  This is in part because many uses are mutually exclusive—a tract of forest used for its timber cannot at the same time provide erosion control services. As well, data required to estimate values for all services are rarely available for a given valuation exercise.

In addition to monetary valuation of EGS, other complementary financial, social, cultural or physical measures can also be used to assess the value of ecosystems and their benefits. These may include non-monetary values such as lives saved, nutrients processed by wetlands and others. Depending on the type of analysis being undertaken, both monetary and non-monetary values can be relevant.

Canadian valuation efforts include work to develop the Environmental Valuation Reference Inventory (EVRI) database, a reference and decision-making resource managed by Environment Canada that is used by researchers around the world. ¹⁷  Other efforts include incorporating valuation into environmental assessment processes. For example, assessing tradeoffs related to water use in Alberta ¹⁸  and coastal planning using an ecosystem-based management approach in British Columbia. ¹⁹ 

Canadian think tanks and environmental non-governmental organizations also use valuation to raise awareness about values associated with EGS across large geographic areas and in respect to specific environmental issues, such as land use change. For example, the David Suzuki Foundation recently published a report that estimates the economic value of various EGS in the greenbelt of the Greater Montréal region. ²⁰ 

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