Scottish natural capital: ecosystem service accounts 2019

9. Quality and methodology

The methodology used to develop these estimates remains under development; the estimates reported in this article are experimental and should be interpreted in this context. Experimental Statistics are those that are in the testing phase, are not yet fully developed and have not been submitted for assessment to the UK Statistics Authority. Experimental Statistics are published to involve customers and stakeholders in their development and as a means of building in quality at an early stage.

This section describes the methodology used to develop Scottish Natural Capital Accounts. The broad approach to valuation and the overarching assumptions made are explained in this section, followed by a more detailed description of the specific methodologies used to value the individual components of natural capital and physical and monetary data sources.

We have used a wide variety of sources for estimates of Scottish natural capital, which have been compiled in line with the guidelines recommended by the United Nations (UN) System of Environmental-Economic Accounting Central Framework and System of Environmental-Economic Accounting Experimental Ecosystem Accounting principles, which are in turn part of the wider framework of the system of national accounts. As the UN guidance is still under development, the Office for National Statistics (ONS) and the Department for Environment, Food and Rural Affairs (Defra) published a summary of the principles underlying the accounts.

We welcome discussion regarding any of the approaches presented.

Annual ecosystem service flow valuation

Two approaches are used to value the annual service flows. For carbon sequestration, pollution removal, recreation and timber, an estimate of physical quantity is multiplied by a price. This price is not a market price but satisfies two accounting conditions:

• firstly, identifying a price that relates, as closely as possible, to contributions provided by the ecosystem to the economy
• secondly, where no market exists, imputing a price that an ecosystem could charge for its services in a theoretical market

These conditions are necessary to integrate and align ecosystem services to services elsewhere in the national accounts, for example, in the accounts woodland timber is an input to the timber sector.

For agricultural biomass, fish capture, water abstraction, minerals, and oil and gas, a “residual value” resource rent approach is used. Before detailed data source and methodology is described, the resource rent approach is defined.

Resource rent definition and assumptions

The resource rent can be interpreted as the annual return stemming directly from the natural capital asset itself, that is, the surplus value accruing to the extractor or user of a natural capital asset calculated after all costs and normal returns have been considered. 

The steps involved in calculating the resource rent are given in Table 1. Variations of this approach are applied depending on the category of natural capital under assessment; the variations are explained in the individual ecosystem service methodology.

Table 1: Derivation of resource rent 

	Output
Less	Operating costs
	Intermediate consumption
	Compensation of employees
	Other taxes on production PLUS other subsidies on production
Equals	Gross operating surplus – SNA basis
Less	Specific subsidies on extraction
Plus	Specific taxes on extraction
Equals	Gross operating surplus – resource rent derivation
Less	User costs of produced assets (consumption of fixed capital + return to produced assets)
Equals	Resource rent

Notes:

^1. SNA: System of National Accounts.

Most of the data used in Scottish resource rent calculations are available from the Scottish Government input-output tables (1998 to 2015). Return to produced asset estimates are calculated using apportioned industry-based net capital stocks and the nominal 10-year government bond yield published by the Bank of England, then deflated using the gross domestic product (GDP) deflator to produce the real yield. This rate is relatively conservative compared with those expected in certain markets and could overstate the resulting resource rent estimates.

Technical guidance on SEEA Experimental Ecosystems Accounting (page 107) (PDF, 2.9MB) acknowledges that the use of the method may result in very small or even negative resource rents. Obst, Hein and Edens (2015) conclude that:

“resource rent type approaches are inappropriate in cases where market structures do not permit the observed market price to incorporate a reasonable exchange value for the relevant ecosystem service. Under these circumstances, alternative approaches, for example, replacement cost approaches, may need to be considered”

If the residual value approach does not produce plausible estimates for subsoil assets and provisioning services, alternative methods should be explored (Principle 7.7). Finally, where unit resource rents can be satisfactorily derived, care still needs to be taken in applying these at a disaggregated level. Even for abiotic flows, the extraction or economic costs could vary spatially and hence national unit resource rents could be misleading for specific regions.

Asset valuation

The net present value (NPV) approach is recommended by the System of Environmental-Economic Accounts (SEEA) and it is applied for all ecosystem services to estimate the asset value. The NPV approach estimates the stream of services that are expected to be generated over the life of the asset. These values are then discounted back to the present accounting period. This provides an estimate of the capital value of the asset relating to that service at a given point in time. There are three main aspects of the NPV method:

• pattern of expected future flows of values
• asset life – time period over which the flows of values are expected to be generated
• choice of discount rate

Pattern of expected future flows of services

An important factor in the valuation of natural capital is determining the expected pattern of future flows of services. These paths are not observed and hence assumptions concerning the flows must be made, generally as a projection of the latest trends. A more basic way to estimate the expected flows is to assume that the current flow (averaged over recent years) is constant over the asset life, but this might not be the case. In some cases, more information is available on future expected levels of services in non-monetary terms or future unit prices. Where there are readily available official projections these have been considered but otherwise the default assumption in these estimates is that the value of the services is constant over time.

This article assumes constant service values throughout the asset life, except for the estimates for carbon sequestration and air pollutant removal by vegetation, where further projections are used.

Where the pattern of expected service values is assumed to be constant, it is based on averages over the latest five years, up to and including the reference year in question. This is set out in Figure 28.

Figure 28: Equation to calculate future service values

Where SV equals service value and t equals reference year

Asset life

The asset life is the expected time over which the services from a natural resource are expected to be provided. An estimate of the asset life is an important component in the NPV model because it determines the expected term over which the service flows from an asset should be discounted. 

Following the ONS and Defra principles paper, this article takes one of three approaches when determining the life of a natural capital asset.

Non-renewable natural capital assets: Where a sufficient level of information on the expected asset lives is available this asset life is applied in the calculations. Where a sufficient level of information on their respective asset lives is not available a 25-year asset life is assumed. 

Renewable natural capital assets: A 100-year asset life is applied to all assets that fall within this category of natural capital.

Choice of discount rate

A discount rate is required to convert the expected stream of service flows into a current period estimate of the overall value. A discount rate expresses a time preference – the preference for the owner of an asset to receive income now rather than in the future. It also reflects the owner’s attitude to risk. The use of discount rates in NPV calculations can be interpreted as an expected rate of return on the environmental assets.

Based on an extensive review (PDF, 453KB) by external consultants, the ONS and Defra use the social discount rate set out in the HM Treasury Green Book (2003, page 100). In line with guidance set out in the document, estimates presented in this article assume a 3.5% discount rate for flows projected out to 30 years, declining to 3.0% thereafter and 2.5% after 75 years. The rationale for this approach is discussed further in the ONS and Defra principles paper.

Methodology by service

Table 1 provides a broad overview of the steps involved in calculating a resource rent using a residual value approach. While this method forms the overarching basis to producing many of the estimates presented in this article, slight adjustments to the method are required for individual service flows. The following section provides an in-depth explanation of the adjustments made for each service, together with more detail where the resource rent approach has not been used.

Agricultural biomass

Agricultural biomass relates to the value of crops, fodder and grazed biomass provided to support agricultural production in Scotland. Physical production of cereals, fruit, and vegetables is published by the Scottish Government. Grazed biomass calculations are based upon Scottish livestock numbers, from the Scottish Agriculture Census and livestock annual roughage requirements provided in the Eurostat Economy-wide Material Flow Accounts (EW-MFA) questionnaire. This approach is used in the UK Ecosystem Service Accounts (PDF, 3.0MB) and UK Material Flows Accounts. 

For the valuation of agricultural biomass a “residual value” resource rent approach is used. This is based upon data for the Standard Industrial Classification (SIC) subdivision class: crop and animal production, hunting and related service activities (SIC 01). The approach can produce quite low values for the ecosystem service, but this is not wholly unexpected as anthropogenic inputs into the production are so significant. 

In estimating the resource rent for the Scottish agricultural biomass provisioning service Scottish input-output tables and source-level apportioning of ONS UK capital stocks is used. The factor used for apportioning net capital stocks and consumption of fixed capital is the proportional relationship between Scotland and UK aggregate agriculture accounts consumption of fixed capital.

Estimating the proportion of agricultural production, which can be attributed to nature rather than modern intensive farming practices, is challenging. Modern farmers heavily manage and interact with the natural services supplied on their land. For example, sowing, irrigation, fertiliser spreading, pesticide use and livestock management are all industrial practices applied to the land. Very intensive farming may even take place entirely indoors without soil or natural light. At the other extreme, livestock may be allowed to roam freely over semi-natural grassland with very limited human intervention. 

As with the principles applied to the UK Natural Capital Accounts, we draw the line between the farmland ecosystem and the economy at the point at which vegetable biomass is extracted (Principle 5.3). This means farmed animals are not included in these estimates as they are considered as produced rather than natural assets, instead the grass and feed that livestock eat are regarded as ecosystem services and so are included. This is also consistent with the boundary between the environment and the economy used in the material flows accounts.

Fish capture

Physical data on marine fish capture (live weight) is sourced from the rectangle-level landings data published annually by the EU Commission’s Joint Research Centre (JRC) Scientific, Technical and Economic Committee for Fisheries (STECF) as part of the Fisheries Dependent Information (FDI) data call (deep sea). 

Both the Scottish Government and the Marine Management Organisation (MMO) publish similar landings data by ICES (The International Council for the Exploration of the Sea) rectangle but the data coverage is not as comprehensive. 

To calculate marine fish capture in the Scottish exclusive economic zone (EEZ) MMO ICES statistical rectangle factors were used. The overall fish capture provisioning service physical flow presented in this article represents landings (tonnage) from Scottish waters. Physical flow presented in the 1997 to 2015 UK Ecosystem Service Accounts was sourced from the Food and Agriculture Organisation (FAO) and represented the fish capture of the UK, not fish capture from UK waters. For comparable data, which are used in analysis, on landings by Scottish vessels and landings into Scottish ports see Scottish Sea Fisheries Statistics 2017. Freshwater fish capture data are available from Marine Scotland.

Valuations are calculated using a resource rent-based approach on the industry subdivision: fishing (SIC 03.1). In estimating the resource rent for the Scottish fish capture provisioning service Scottish input-output tables and source-level apportioning of ONS UK capital stocks is used. The factor used for apportioning net capital stocks and consumption of fixed capital was the proportional annual relationship between Scotland fishing (SIC 03.1) and UK fishing and aquaculture (SIC 03) intermediate consumption at purchasers' prices. The Scottish fish capture provisioning service valuation should be interpreted as a minimum valuation as it excludes fish capture in Scottish waters not represented in Scottish National Accounts.

Aquaculture or farmed fish, like farmed livestock, have been removed from estimates, as farmed fish are viewed as a produced asset and not a natural asset. This method does not recognise that farmed fishing may have different productivity and resource intensity than catching fish at sea or in inland waters. Further work is needed to assess if other data sources could be used to estimate the value of caught fish only.

Timber

The method used to value the provisioning services related to timber supply requires two inputs: the stumpage price and the physical amount of timber removed. Annual flow values are then generated by multiplying the two factors together.

Removals estimates are taken from Forestry Commission Timber Statistics and converted from green tonnes to metres cubed (m3) overbark standing, using a conversion factor of 1.222 for softwood and 1.111 for hardwood.

The stumpage price is the price paid per standing tree, including the bark and before felling, from a given land area. Stumpage prices may include some management overheads and return to capital but these amounts are not expected to be significant. Stumpage prices are sourced from the Forestry Commission Coniferous Standing Sales Price Index in the Timber Price Indices publication (2018). The Coniferous Standing Sales Price Index monitors changes in the average price received per cubic metre (overbark) for timber that the Forestry Commission or Natural Resources Wales sold standing, where the purchaser is responsible for harvesting. 

Water abstraction

Physical estimates of water abstraction for public water supply are available from Scottish water.

Monetary estimates are based on the “residual value” resource rent approach calculated for the SIC subdivision class: water collection, treatment and supply (SIC 36). The definition of this industry subdivision states: 

“the collection, treatment and distribution of water for domestic and industrial needs. Collection of water from various sources, as well as distribution by various means is included” 

A limitation of this approach, therefore, is that the calculated resource rent is not purely related to water supply, but also includes the process of treating the water.

As with the UK Ecosystem Service Accounts, the valuation of water abstraction does not include significant uses, particularly in Scotland, such as drinks manufacturing and hydroelectric power.

In estimating the resource rent for the Scottish water abstraction provisioning service Scottish input-output tables and source-level apportioning of ONS UK capital stocks is used. The factor used for apportioning net capital stocks and consumption of fixed capital was the proportional annual relationship between Scotland and UK water collection, treatment and supply (SIC 36) intermediate consumption at purchasers' prices.

Future work is required to better value the range of services relating to water provided by the natural environment. The residual value method has in our experience to date generated a relatively high resource rent for public water supply, which could be considered inconsistent with the concept of a price regulator and normal returns. 

In future, water may be traded between water companies although the prices charged may depend more upon covering the overheads of delivery than on the value of the resource on its own. It is also possible that abstraction licence charges may provide an estimate of the amount of resource rent captured by the government. This requires further research.

Minerals

Physical estimates of mineral extraction in Scotland have been provided by the British Geological Survey (BGS) as a country-level breakdown of the United Kingdom Minerals Yearbook. 

Monetary estimates are based on the “residual value” resource rent approach calculated from the SIC subdivision class: other mining and quarrying (SIC 08). In estimating the resource rent for the Scottish minerals abiotic provisioning service Scottish input-output tables and source-level apportioning of ONS UK capital stocks is used. The factor used for apportioning net capital stocks and consumption of fixed capital was the proportional annual relationship between Scotland and UK other mining and quarrying (SIC 08) intermediate consumption at purchasers' prices.

Oil and gas

Physical estimates of oil and gas production in Scotland are available from the Scottish Government Oil and Gas production statistics 2017 to 2018. 

Monetary estimates are based on the methodology published by the ONS in June 2013, following a “residual value” resource rent approach calculated from the SIC subdivision class: extraction of crude petroleum and natural gas (SIC 06). Production statistics are combined with oil and gas price data supplied by the Oil and Gas Authority (OGA) to calculate income. Deductions are then made for operating expenditure, sourced from Scottish Government and user costs of produced assets, apportioned from ONS UK capital stocks data. The factor used for apportioning net capital stocks and consumption of fixed capital was the proportional annual relationship between Scotland and UK oil and gas production. 

As with the 1999 to 2015 UK Ecosystem Service Accounts, for asset valuation of oil and gas an asset life of 25 years has been assumed. Asset valuation utilises annual projected UK oil and gas production from the OGA until 2035. Then, following OGA methodology, assumes a further 5% production decline per year (for all years following 2035) to be able to project over the full 25-year asset lifetime. UK production projections are apportioned for Scotland based upon current Scottish contribution to UK production. To estimate valuations in future years annual five-year averages of “unit resource rent” (average resource rent divided by average production) are applied to production projections.

As with all services, the methods used will be reviewed for future updates.

Renewables

Energy generated by renewable sources is published in the Scottish Government Energy Statistics Database. Other biofuels renewable sources published in the reference tables include energy from waste combustion, co-firing with fossil fuels, animal biomass and anaerobic digestion.

The monetary estimates are gross value added (GVA) only and not resource rent calculations, therefore are over-estimates. GVA estimates were calculated on the same basis as the UK environmental goods and services sector (EGSS) estimates. A detailed publication on EGSS estimates was published in May 2018. 

GVA attributed to electric power generation, transmission and distribution is derived from the Scottish input-output tables using classification of product by activity (CPA) 35.1. These data are then apportioned using detailed information from the ONS regional Annual Business Survey (ABS) to derive the GVA of 35.11: production of electricity. Then differential levelised costs of production (Department for Business, Energy and Industrial Strategy) between conventional and renewable electricity generation, weighted by the physical amount of electricity generated by the different sources, were applied to the GVA of electric power generation to estimate the GVA of electricity from renewable sources. 

A “levelised cost” is the average cost of the lifetime of the plant per megawatt-hour of electricity generated. They reflect the cost of building, operating and decommissioning a generic plant for each technology.

Using current methods for renewable electricity generation valuation, decreasing levelised costs of renewable generation acts as a counterweight to increasing generation.

Carbon sequestration

Estimates relate to the removal of carbon gas from the atmosphere by Scottish terrestrial ecosystems. The approach used combines data on the physical changes in subdivisions of the land use, land-use change, and forestry (LULUCF) sector (published in the Greenhouse gas inventory and LULUCF emission projections, with information on the central non-traded price of carbon. 

Due to data constraints, values related to carbon sequestration by marine ecosystems, including those intertidal areas such as coastal margins, are not included in current estimates. As a result, annual flow values related to carbon sequestration services are likely to be an underestimate.

The LULUCF sector breakdown identifies carbon sequestration activities in the following subcategories:

• forest land remaining forest land
• land converted to forest land
• grassland remaining grassland
• land converted to grassland

For the years 1990 to 2016, actual physical estimates of carbon sequestration by land use class are sourced from the greenhouse gas inventory. In the asset valuation, projections of carbon sequestration rates are provided for the years 2017 to 2050 by the National Atmospheric Emission Inventory (NAEI) in the LULUCF emission projections. Central projections are used. For years used in the projections beyond 2050, the carbon sequestration rate is assumed to be constant as at 2050 levels.

The carbon price used in calculations is based on the projected non-traded price of carbon schedule. This is contained within the data table 3 of the Green Book supplementary guidance. Carbon prices are available from 2010 to 2100. Prices prior to 2010 are backdated in line with recent trends. Prices beyond 2100 are assumed to be constant at 2100 levels. 

The non-traded carbon prices are used in appraising policies influencing emissions in sectors not covered by the EU-ETS (the non-traded sector). This is based on estimates of the marginal abatement cost (MAC) required to meet a specific emission reduction target. Beyond 2030, with the development of a more comprehensive global carbon market, the traded and non-traded prices of carbon converge into a single-traded price of carbon.

Air pollutant removal by vegetation

Air quality regulation estimates have been supplied in consultation with the Centre for Ecology and Hydrology (CEH). A full methodology report published in July 2017 is available.

Calculation of the physical flow account uses the European Monitoring and Evaluation Program Unified Model for the UK (EMEP4UK) atmospheric chemistry and transport model, which generates pollutant concentrations directly from emissions and dynamically calculates pollutant transport and deposition, considering meteorology and pollutant interactions. 

The health benefits were calculated from the change in pollutant exposure from the EMEP4UK scenario comparisons, that is, the change in pollutant concentration to which people are exposed. Damage costs per unit exposure were then applied to the benefitting population at the local authority level for a range of avoided health outcomes:

• respiratory hospital admissions
• cardiovascular hospital admissions
• loss of life years (long-term exposure effects from PM2.5 and nitrogen dioxide (NO2)
• deaths (short-term exposure effects from ozone (O3)

Some years generated negative values for the economic value of NO2 removal. In cases where a net disservice is presented the economic value is adjusted to zero. 

Future flow projections used for asset valuation incorporate population projections and an assumed 2% increase in income per year (declining to 1.5% after 30 years and 1% after 75 years). Income elasticity is assumed to be 1. More work is being conducted in this area.

Recreation

The recreation estimates are adapted from the “simple travel cost” method developed by Ricardo-AEA. The methodological report Reviewing cultural services valuation methodology for inclusion in aggregate UK natural capital estimate is available. This method was originally created for use on the Monitor of Engagement with the Natural Environment (MENE) Survey, which covers recreational visits by respondents in England.

The method looks at the expenditure incurred to travel to the natural environment and expenditure incurred during the visit. This expenditure method considers the market goods consumed as part of making the recreational visit (that is, fuel, public transport costs, admission charges and parking fees). This expenditure is currently assumed as a proxy for a marginal price for accessing the site.

The 2003 to 2012 Scottish Recreation Survey (ScRS) was the primary data source used in producing the recreation estimates in this article. The ScRS questions used in the method largely mirrored those in the MENE survey. The ScRS ran between 2003 and 2012 and was undertaken through the inclusion of a series of questions in every monthly wave of the TNS consumer omnibus survey, the Scottish Opinion Survey (SOS). 

In every month of the Scottish Opinion Survey around 1,000 face-to-face interviews are undertaken with adults in Scotland aged 16 years and over. The survey approach followed ensures that the resultant sample is consistently representative of the Scottish adult population in terms of sex, age group, working status and socioeconomic status. Replacing the ScRS, Scottish Natural Heritage commissioned the Scotland’s People and Nature Survey (SPANS) for the first time in 2013 to 2014, then again in 2017 to 2018. 

These surveys focus on short day-trips from home and miss out potentially large amounts of spending on outdoor activity from domestic tourism, which future reports will include.

Unlike ScRS, the SPANS does not include questions on respondent expenditure during their last outdoor recreation visit. To produce estimates beyond 2012, expenditure and time spent in 2012, from the ScRS, have been scaled in accordance with SPANS visit numbers. This method has been taken to produce timely estimations of overall Scottish natural capital asset value, which are comparable with the 1997 to 2015 UK Ecosystem Service Accounts. In future releases, we will seek to fully incorporate SPANS data on time spent, and calculated fuel costs to increase the accuracy of estimates. Beyond 2012, habitat disaggregation of Scottish outdoor recreation is not currently available.

Habitat disaggregated estimations of expenditure and time spent may not sum to overall time spent. This is because habitat estimates were based upon a portion of the sample, which answered a question on habitats visited.

The visits numbers are taken directly from the habitats that each respondent reported. The visit weighting is split equally across all habitats reported by each participant. The time spent in the habitat is calculated by taking the total time (including travel time), which is asked in the survey and subtracting an estimated travel time. Travel time is calculated using the reported distance travelled to get to the visit, which is multiplied by the average speed relating to the form of transport used, taken from the Ricardo report. 

The “simple travel-cost” method used on the ScRS data forms a monetary estimate for the amount a person is willing to spend visiting the natural environment. This is done by adding the reported costs on admissions, car parking and bus, train or ferry fares; for participants who travelled by car, motorcycle or taxi then the cost was calculated and added. The reported fuel costs were deemed to be unreliable for the purposes of this estimation. The fuel costs for these vehicles are estimated using the mileage and multiplied by a cost per mile value, which is taken from the Ricardo report.

The UK estimates are scaled from the MENE survey to represent the UK population. Therefore, since UK estimates did not include Scottish, Welsh, or Northern Ireland surveys, comparisons between Scottish and UK values are, in effect, comparisons with inflated English trends. We will seek to fully incorporate additional surveys, such as ScRS and SPANS, in future UK estimations of outdoor recreation.

In the ScRS there is a question for the main habitat that was visited; it was considered that this could be used as opposed to splitting the respondent data across the habitats they reported visiting, however, it was decided that the same method should be used to ensure the Scottish estimates would be as comparable as possible with the UK estimates.

Question seven in the Scottish Recreation Survey asks respondents about what types of location they visited on their last outdoor recreation visit. These locations form the basis of broad habitat disaggregation of outdoor recreation estimates in this article. 

For the asset valuation of outdoor recreation in Scotland, projected population growth calculated from ONS population statistics and income uplift assumption, matching the method used in the most recent UK ecosystem services accounts, were implemented into the estimation. The income uplift assumptions are 1%, declining to 0.75% after 30 years and 0.5% after a further 45 years.

It is acknowledged that the “simple travel-cost method” provides an underestimation of the monetary worth of the natural environment. Primarily, this is because there are several benefits that are not accounted for including scientific and educational interactions, health benefits and aesthetic interactions. Currently, there is no method in use that incorporates these considerations. Additionally, the value of the time spent by people in the natural environment is not incorporated because no method is thought to be reliable enough to accurately capture this.

Table 2: Broad habitat classifications derived from Scottish Recreation Survey destinations (question seven)

Broad habitat	Scottish Recreation Survey habitats
Woodland	Woodland\forest – managed by Forestry Commission\Forest Enterprise Woodland\forest – other type of owner Woodland\forest – don’t know owner
Mountain and moorland	Mountain\moorland Moorland Mountain\hill
Rivers and canals	River\canal River Canal
Farmland	Farmland – fields of crop Farmland – fields with livestock Farmland – mixed crop and livestock Farmland unspecified Country\countryside
Coastal margin	Beach Cliff Beach\cliff Sea\sea-loch
Wildlife area	Wildlife areas
Lochs and reservoirs	Lochs Reservoirs
Urban	Village Local park or open space Towns Golf course\football stadium  Local urban Local area City Country lanes Castle\historical building Local show\festival Leisure\sports centre Streets\roads Garden
Other	Other None of these