The Biden White House issued National Strategy To Develop Statistics For Environmental-Economic Decisions: A U.S. System of Natural Capital Accounting And Associated Environmental-Economic Statistics (“Report” or “Strategic Plan”) in January 2023.
The Report represents another significant Biden Administration initiative – complementing important climate-related provisions of the November 2021 Bipartisan Infrastructure Deal and August 2022 Inflation Reduction Act. The Bipartisan Infrastructure Deal and Inflation Reduction Act together target some $681.5 billion of federal investment toward various economic sectors deemed critical to mitigating climate change. The January 2023 Strategic Plan seeks to expand the collective measures of success for the U.S. economy.
The Report presents a dramatic long-term roadmap for more expansive, nature-inclusive U.S. Government economic activity reporting. It seeks to more comprehensively join U.S. efforts with current international leadership on critical issues of accounting for economic activities’ impacts and dependencies upon natural assets – thereby helping address the planet’s primary existential threats of continued biodiversity loss and global warming.
The Co-Chairs for the Report were the White House Office of Science and Technology Policy (OSTP), Office of Management and Budget (OMB), and Department of Commerce (DOC). OSTP, OMB and DOC organized an Interagency Policy Working Group, consisting of representatives from 27 Federal agencies, to “chart a course to measure natural capital in official U.S. economic statistics” and propose “an expansion of the national economic accounting system … to provide new information to capture links between nature and the economy.” As stated in the Executive Summary of the document, “the path articulated in the Strategic Plan treats nature as an asset and incorporates these assets on the national balance sheet. These (natural asset) accounts and statistics can work alongside traditional economic statistics, such as Gross Domestic Product (GDP), to help guide economic decision making to be more inclusive of the services – or benefits to humans – (which) nature provides.”
Recall that Gross Domestic Product (GDP) is estimated from three perspectives: expenditures, income, and production.
“Nature connects to society in many ways, including through connections to the economy. Stocks of harvestable natural resources, such as fish, timber, water, and minerals, underpin the economy and are the first links in many supply chains. Nature supports economic security and progress beyond providing harvestable resources. For example, standing forests and wetlands purify water, regulate climate, and provide opportunities for outdoor recreation. Whether harvested or left in place, nature provides economic opportunities in the present and stores economic opportunities for the future. This is why economists refer to stocks of nature as natural capital or natural assets.”
Continuing, “Americans understand that the economy is intertwined with our climate, ecosystems, and biodiversity. Nearly every economic sector uses services from, and has important dependencies on, natural assets.” I would add that nearly every economic sector also poses direct and indirect impacts upon nature – see Natural Capital Protocol.
Strategic Plan Organization
The Strategic Plan is comprised of six major sections and five appendices:
I. The Need for a System of Statistics for Environmental-Economic Decisions
II. Renewing U.S. Leadership and Building on Strength
III. Connecting Natural Capital Accounts and Environmental Statistics with National Economic Accounts
IV. Developing a U.S. System of Statistics for Environmental-Economic Decisions: Targets, Timelines, and Tasks
V. Administrative Coordination Across the Federal Government and
Appendix A – The Development of Environmental-Economic Statistics
Appendix B – Connecting Natural Capital and Environmental-Economic Statistics with National Economic Accounts
Appendix C – Pathways to Production Grade Accounts and Core Statistical Products
Appendix D – Authority and Applicable Guidelines for Developing Natural Capital Accounts and Associated Environmental-Economic Statistics within the United States
Appendix E – Themes from Public Comment.
Some Key Recommendations and the Boundaries Framework
The Report establishes a set of five recommendations for U.S. Federal departments and agencies as to “how to develop and use nature capital accounts and environmental-economic statistics” – see pages viii and ix of Executive Summary. Among those of particular interest, from my valuation advisory services perspective, are Recommendations 3 and 4:
“Recommendation 3. The natural capital accounts and associated environmental-economic statistics should be embedded in the broader U.S. economic statistical system, and guide the process of embedding with three sub-recommendations. Federal departments and agencies should:
a. Incorporate the internationally-agreed standards of the U.N. System of Environmental Accounting (SEEA CF & EA) to guide development of U.S. natural capital accounts … .
b. Adhere to more than one, but a small number of, specific asset boundaries, connected to economic activities, in order to accommodate different applications and contexts and be inclusive of different uses and perspective; and
c. Use rigorous and best available economic science for monetizing the value of natural assets.”
“Recommendation 4. Federal departments and agencies should use a 15-year phased approach to transition from research grade environmental-economic statistics and natural capital accounts to core statistical products, and produce a single headline summary statistic, along with supporting products, tables and reports that provide information in physical and monetary units.
a. The phased approach is designed to enable new information to be available early in the process, facilitate the first pilot accounts appearing in 2023, provide for testing and development, while over the long-term meeting high statistical standards and producing a durable and more comprehensive set of statistics to expand the nation economic accounts.
b. The Strategic Plan recommends that natural capital accounts produce a new forward-looking headline measure focused on the change in wealth held in nature: Change in Natural Asset Wealth. Integrating this new measure with changes in GDP would provide a more complete and more useful view of U.S. economic progress. Pairing Change in Natural Asset Wealth with GDP would help society tell if today’s consumption is being accomplished without compromising the future opportunities that nature provides.
c. The Strategic Plan also recommends the use of dashboards for biological and physical measures.”
The Report’s consideration and discussion of natural capital supports a framework developed within the February 2021 Economics of Biodiversity: The Dasgupta Review. The Dasgupta Review characterizes degradation of natural capital as an “asset management problem.” Hence, the concept of asset (accounting) boundaries figures prominently within the Strategic Plan discussion. Three specific asset boundaries are identified and discussed within the January 2023 Report:
The SNA (System of National Accounts) production boundary,
Defensive expenditures, and
Individual and household production.
System of National Accounts
Note that the U.S. Bureau of Economic Analysis (BEA) defines the SNA (System of National Accounts) as follows:
“An international set of guidelines for a system of economic accounts, published by the Commissioner for the European Communities, the International Monetary Fund, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank. The SNA organizes information about the flows and stocks that describe an economy within a comprehensive, integrated framework. The SNA provides the general accounting framework for the national economic accounts for the United States and other countries. The most recent edition of the SNA was published in 2008.”
The BEA describes the production boundary as “the boundary that defines what is considered to be production in an accounting system. In the NIPAs (National Income and Product Accounts), the boundary includes the production of most goods and services for the market, the production of goods or fixed assets by producers for their own final use as consumption or as fixed investment, and certain nonmarket activities, such as the provision of most goods and services by government agencies and by nonprofit institutions, and the production of housing services by owner-occupied housing. It excludes (by way of example – parenthetical added) other nonmarket activities such as unpaid household work, volunteer work, and the natural growth of forests (emphasis added).”
Further Working Group commentary pertaining to the SNA boundary reveals additional, important rationale and objectives underlying development of the Strategic Plan – see following three excerpted paragraphs (Pages 21-22 of Report):
“The SNA production boundary focuses on monetary flow information, but leaves out aspects that are economically significant for broad policy and decision making. Monetary flow information on market exchanges has historically been useful for policy decisions related to analysis of inflation, Federal budget analysis, specific industrial policies, and other specific financial policy questions. However, monetary flow information alone is insufficient for judging economic progress (emphasis added).
“Policy leaders speak about national economic accounts, or their summaries such as GDP, in terms mostly focused on broad economic policy questions. This aligns with the ‘primary purpose’ of the SNA as supporting ‘economic analysis, decision-making and policymaking.’ However, the current production boundary is narrower, focusing only on monetary flows within markets. The SNA acknowledges the economic importance of non-market services but states that goods and services not exchanged in markets, ‘have little relevance for the analysis of inflation or deflation or other disequilibria within the economy. The inclusion of large non-monetary flows of this kind in the accounts together with monetary flows can obscure what is happening in markets and reduce the analytical usefulness of the data.’ A new chapter in the 2025 SNA is planned to begin addressing this disconnect (emphasis added). Furthermore, the SNA’s statement about non-market services may not account for cases when systematic changes in non-market services introduce systematic measurement error into the value added of market goods, and such measurement errors are likely from the effects of climate change and nature loss (emphasis added).”
“The SNA asset boundary depends upon the production boundary, but the asset boundary includes non-financial and non-produced assets, including some biological and natural assets. For example, language in the internationally agreed-upon SNA states ‘natural assets are treated as assets in the SNA. Natural resources such as land, mineral deposits, fuel reserves, uncultivated forests or other vegetation and wild animals are included in the balance sheets … . Thus, many environmental assets are included within the SNA.’ Creation, depletion, or degradation of these assets does not directly affect current production, but when it influences future production, then these assets are within the SNA asset boundary. Including natural assets on national balance sheets with monetary information that informs macroeconomic policy remains in its infancy in the United States (emphasis added) and is uncommon globally, though a few countries do have some natural assets on their balance sheets, most notably land.”
The importance of the SNA asset boundary revamping can be represented by the following statement appearing on page 22 of the Report: “Complying with the SNA boundary, and putting the natural assets that are within the SNA boundaries on the balance sheet, will be a substantial step in connecting nature with the economy (emphasis added). This is a focus in the 2025 SNA revision.”
Lastly and importantly with respect to the SNA, the authors state the following on pages 22-23 of the Report – under the caption direct contribution to direct production and market proximate income that corresponds to the SNA production boundary or its implementation in the U.S. – “Changes in pollinator populations may change agricultural production of pollinator-dependent fruits and vegetables. While changes in groundwater may influence net revenue of row crops. Including these assets is straightforward and aligns with the current measures of production, gross or net. While the current production boundary considers monetary investments in these assets it ignores investment by forbearance, so actions that lead to natural growth in natural assets are not considered an investment adding to GDP, NDP (Net Domestic Product), or NNI (Net National Income). However, the 2025 SNA revision may call for growth of these stocks to be treated as fixed capital formation, which would help address this challenge. Including natural capital is a precursor to enabling this treatment and enabling certain activities of forbearance and conservation to be accounted for as investment.”
The Strategic Plan in fact describes conservation “as an economic necessity.”
The second asset boundary identified and described within the Strategic Plan pertains to the notion of Defensive Expenditures. As stated on pages 23-24 of the Report, “defensive expenditures are expenditures that prevent or reduce ‘bad outcomes’ such as injuries and deaths. Expenditures that replace or enhance unpriced natural capital are defensive expenditures (emphasis added). These expenditures often involve providing substitute services or complementary capital investment. … The suite of natural capital accounts, accounting for defensive expenditures, and the NIPA (National Income Product Accounts) together provide a more complete picture of the economy, where natural assets are valued at the present value of the flow of services provided, rather than at the cost of provision.”
The authors further state on page 27 of the Strategic Plan that “adjusting for defensive expenditures implies that when this boundary is used, the avoided damages associated with actual increases in natural capital investment should be factored into the marginal value of natural capital. For example, using the SNA boundary, a sand dune that protects houses from flooding is valued at the cost of acquiring the sand dune. If the dune is naturally produced, this may be zero. With a defensive expenditure’s adjustment, it is reasonable to value a protected sand dune based on how the storm protection service capitalizes into property prices or insurance premium savings.”
Individual and Household Production
The third boundary pertains to in-kind income that stems from the set of services individuals and households produce for themselves. The authors’ rationale and examples are set forth on page 24 of the Report:
“These services are generally beyond the production boundary of the SNA. Still, many of these services, such as some forms of outdoor recreation, are important to economic prosperity and are relevant to economic decision-making. The SNA, and by extension the U.S. NIPA, places these services outside the production boundary because these services are not marketable production and are seen as making analysis of topics such as inflation more challenging. However, labor supply, wage rates, and policy do impact financial stability. In some cases, the state of natural capital may affect employment choices and wage rates. There is some evidence that employees may accept lower wages for environmentally-friendly firms, require a wage premium to work in a pollution-intensive industry, and may accept reduced wages in exchange for high-quality natural amenities in the work space. Furthermore, cleaner air and easier access to forests and green spaces may raise the value of leisure time, possibly leading workers to demand higher wages to forgo leisure. Thus, it is important to assess the monetary value of these natural capital-dependent services that individuals and households produce for themselves. These effects may be partially captured within the SNA boundary but are not attributed to the contributions of natural capital. Furthermore, given the way the accounts are used to assess overall economic prosperity, extensions to include services that individuals produce for themselves is important. This topic is closely related to “unpaid household service work,” a topic being taken up in the 2025 SNA revision.”
Collective Representation of Boundaries
The authors present the three boundaries (in Figure 2 of the Report) as follows noting that “which boundary applies to a given natural asset depends on management and understanding of interactions.”
With respect to “changes in management or understanding” identified at the center of the preceding diagram, the authors state that “national (natural) account compilers must balance consistency, reliability, and generality with purpose-built accounts—while keeping use cases and user experience in mind. Modern data management enables the ability to work with a small number of conceptually well-defined boundaries.”
The relationships among (allocational methodology presently envisioned for) the three boundaries are detailed within Figure 1 of the Report.
U.N. System of Environmental Accounting
I previously referenced the SEEA in this article – see Strategic Plan Recommendation 3.a. Note that the “SEEA CF + EA Asset Boundary” is represented as the backdrop for the three Strategic Plan asset boundaries – see Figure 2 of the Report and prior diagram in this article. The Report’s expanded discussion within Recommendation 3.a, with regard to SEEA, includes the following:
“The SEEA was developed by the international statistical community and adopted by the U.N. Statistical Commission, and it is increasingly being connected to the SNA. SEEA consists of two parts. First, the SEEA Central Framework (SEEA CF) is an international statistical standard that quantifies connections between the environment and the economy through (1) stock of environmental assets, (2) environmental flows into and out of the economy, and (3) economic activity related to the environment. Information about resources – such as land, water, agriculture, fisheries, forestry, minerals – and unintended production outputs – such as pollution and waste (or ‘residuals’) – are combined into a system designed for compatibility with the SNA. Second, the SEEA Ecosystem Accounting (SEEA EA) quantifies ecosystems’ (1) extent, (2) condition, (3) supply and use of ecosystem services in physical, (4) monetary terms, and finally (5) asset accounts that quantify the net present value of stocks of ecosystem assets. SEEA EA was revised from 2019 to 2021, and, in 2021, the U.N. Statistical Commission adopted the physical measurement elements of the SEEA EA. However, the U.N. Statistical Commission simultaneously recognized the less mature state of monetary ecosystem accounting and it recommended that further experimental work continue on valuation and monetization (emphasis added), and it is important that the United States engage with the further development of these standards.” (Pages 15-16 of Report).
This (U.S. Federal Government express commitment to the SEEA CF and EA frameworks) is significant – notwithstanding acknowledgement of the evolutionary nature of those frameworks.
Organization and Prioritization
The process underlying implementation of the Strategic Plan is designated across a 2023 – 2036 timeline – reflecting the plan’s scope and complexity. Among the challenges facing the plan’s execution is the fact that it involves numerous federal departments, agencies and offices including: “Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), Census Bureau (Census), Chief Statistician of the United States (CSOTUS), Department of the Interior (DOI), Environmental Protection Agency (EPA), National Aeronautics and Space Administration (NASA), National Oceanic and Atmospheric Administration (NOAA), Office of Management and Budget (OMB), Department of State (State), Department of the Treasury (Treasury), Department of Agriculture (USDA), U.S. Forest Service (USFS), and United States Geological Survey (USGS).” Note that BEA, NOAA and Census are members of the Department of Commerce (DOC) – the DOC being one of the Report’s three authors and organizing members of the Interagency Policy Working Group.
Gantt Charts are presented for 2023-2036 plan in Figure 3 of the Report – I do not here present the charts – as a further invitation to the reader to review the full report. Plan development processes and products intend to evolve from pilot => prototype => finalized methodologies within the following categories of activities:
a. Creation of two headline economic summaries – changes in natural capital wealth and net domestic product inclusive of natural assets
b. Eight satellite accounts and supporting products – as an example “environmental-economic input-output tables and data to support macroeconomic modeling”
c. Three phases representing specifically targeted environmental sectors and
d. Other supporting activities – including “valuation standards for national accounting”.
The scope of the endeavor and anticipated resources evidently required prioritization of effort toward three groups (phases) of environmental sectors:
Phase 1 – air emissions, water, land environmental activities and jobs, and marine natural capital (I),
Phase 2 – minerals and energy, forests, urban green space, pollinators, and marine natural capital (II), and
Phase 3 – wildlife (including birds, mammals and fish), wetlands and peatlands, soils, grasslands / desserts / tundra / etc., marine natural capital (III), and non-traditional geologic assets.
One can imagine impassioned discussions regarding assignment of priorities given the importance of all of these sectors – to the health of the planet and long-term well-being of mankind.
The pilot activities of the Strategic Plan alone commonly assume 3-5-year periods. The earliest production stage milestones, for the Phase 1 environmental sectors, are assumed to be completed by the end of 2028. And, efforts required to achieve production grade headline summary statistics are projected to extend to 2036.
I stand and loudly applaud the Biden Administration for launching this initiative. The objective and associated efforts demonstrate further re-engagement with the international community on the issue of climate. U.S. Federal spendingrepresents approximately 25% of the world’s largest economy. In absolute terms, therefore, execution of the Strategic Plan would be impactful. More importantly, it would help establish foundational federal policy and demonstrate leadership with respect to addressing continued loss of biodiversity and associated global warming.
While the Report directly pertains to “implementing and institutionalizing natural capital accounting and environmental-economic statistics in the Federal Government (emphasis added), the authors additionally state that “many business leaders know that it is critical to understand how natural assets are changing to help manage business risks … . They are looking to the Federal Government to model leadership in accounting for natural capital on balance sheets.” (Pages 2 – 3 of Report).
Further, as additionally stated in the Report, “as national (natural) capital accounts bring water, soil, and other natural assets onto balance sheets, it is reasonable to expect that the private sector will accelerate transformation of its own balance sheets to create similar accounting. This may enable conservation activities and stewardship of natural capital to become a credit-enhancing activity for America’s landowners who contribute to increasing the stock of U.S. natural capital.” (Page 12 of Report)
As execution of this plan proceeds, it will prove most interesting to see the rate, breadth and depth of the approaches’ adoptions within the private sector. Path Partners will pay close attention and seek to assist clients during their accorded journeys.
What might be said as to prospects for implementation of this plan? Note that I titled this article as a question. The Strategic Plan’s authors emphasize that the initiative will be pursued under existing federal authority, including an Executive Order and federal legislation. I note, with some reservation, however, the following page 29 statement in the Report:
“To ensure the necessary commitment from relevant departments and agencies, it is important to lay out a clear timeline for development and the steps required to achieve a production-grade system of core environmental-economic statistics and natural capital accounts, acknowledging that execution will be dependent on the availability of resources (emphasis added).” Federal priorities and resource commitments can change every two years in the United States. I readily understand this reality. I worked, under three different administrations, for one of the U.S. Federal Departments (Treasury) now tasked with carrying out the Strategic Plan.
Recall that it was only June of 2017 when the POTUS 45 White House withdrew from the 2015 Paris Agreement. More recently, the merits of Environmental, Social and Governance (ESG)-driven investment management, at least with respect to certain state government sponsored pensions, has entered the political theater. What issue escapes this venue? Hence, the outcomes of the Strategic Plan may be determined by a varying composition of political power in Washington, D.C. over the initiative’s execution time horizon. Meanwhile, time, unmistakably, is of essence.
While the balance of political power may be said to determine the destiny of any important policy initiative, foreign or domestic, this one, addressing the existential challenges of biodiversity loss and climate change, is potentially transcendent and for all the marbles – including, especially, this one: