Determination of primary purpose

4.15 While some economic activities may be undertaken only for a single purpose, many activities are undertaken for a variety of purposes. Following general principles of classification, activities are deemed to be environmental activities only if the primary purpose of the activity is consistent with the definitions of the two types of environmental activity listed as environmental, i.e., environmental protection and resource management. In practice, the primary purpose must be attributed to particular transactions or groups of transactions as recorded in the accounts.

4.16 In determining the primary purpose, a variety of motivations for undertaking the activity may be relevant. The activity may be undertaken on a purely voluntary basis, or in order to comply with relevant legislation or regulation, or within the framework of a voluntary agreement.

4.17 In some situations, it is necessary to consider the suitability of various goods and services for achieving environmental purposes by considering the good or service in question from a technical perspective. This is particularly relevant in the assessment of whether certain goods are “cleaner” or more environmentally friendly than other, similar goods. The issues of determining primary purpose are discussed further in section 4.3.

Purpose of the EPEA

4.45 The purpose of establishing accounts for environmental protection expenditure is to enable identification and measurement of society’s response to environmental concerns through the supply of and demand for environmental protection services and through the adoption of production and consumption behaviour aimed at preventing environmental degradation. To this end, the EPEA provide information on the output of environmental protection specific services produced across the economy and on the expenditure of resident units on all goods and services for environmental protection purposes.

4.46 With this information, the EPEA can be used to analyse the extent of environmental protection activities and to assess how expenditure on environmental protection is financed. The accounts can also be used to derive indicators for highlighting change in key areas, such as the expenditure on pollution prevention and abatement, the contribution made by environmental protection activities to the economy, and the shift to pollution-preventing technologies.

4.47 Measuring the financial commitment of an economy to environmental protection may assist in evaluating the influence of environmental protection costs on international competitiveness, the execution of the polluter pays principles, and the cost-effectiveness of environmental control mechanisms. Monetary data may also be used to examine the extent to which different economic agents internalize the actual costs of environmental protection in their decision-making. In this regard, data on environmental taxes may provide useful complementary information (see sect. 4.4).

4.48 Additional analysis may also be supported by linking expenditure on environmental protection to physical data, such as the amount of waste treated or the quantity of air emissions. Models may be developed that link potential changes in environmental pressures, such as air emissions, to future economic activity, given particular amounts of expenditure on environmental protection.

EPEA tables

4.49 There are four main, interlinked EPEA tables. The first table is a combined production and generation of income account which presents information on the production of characteristic environmental protection products, i.e., environmental protection specific services, by resident producers. The second is a supply and use table for these specific services, which displays the total supply of specific services from resident producers and the rest of the world and the use of environmental protection specific services by various economic units.

4.50 The third table broadens the scope of the EPEA to include connected products and adapted goods purchased by those undertaking environmental protection activities. It also includes capital formation for environmental protection activities by specialist, non-specialist and own-account producers, and relevant environmental protection transfers. The inclusion of these flows provides an estimate of the total outlays by an economy on environmental protection which is reflected in the aggregate: national expenditure on environmental protection. The fourth table is an extension of the third table designed to present the financing of national expenditure on environmental protection.

4.51 The EPEA tables are all couched within the broader sequence of economic accounts that defines relationships between various transactions. Using the structure of the sequence of accounts means that the various transactions related to environmental protection can be easily related to each other and to other transactions, following the same accounting conventions that apply in the SNA.

4.52 The transactions in environmental goods and services presented in the tables in this section can be further disaggregated by classifying the relevant production and expenditure according to the environmental protection classes of the Classification of Environmental Activities as presented in section 4.2.

Production of environmental protection specific services

4.53 Environmental protection specific services are those products that are “characteristic” or typical of environmental protection activity. Hence, environmental protection specific services are environmental protection services produced by economic units for sale or own use. Examples of environmental protection specific services are waste and wastewater management and treatment services.

4.54 The production of environmental protection specific services is presented in table 4.2. The production of environmental protection services is broken down by specialist producers, non-specialist producers and own-account producers. In addition, government specialist producers are separately identified.

Table 4.2.

Production of environmental protection specific services

(currency units)

Table 4.2.

Production of environmental protection specific services

(currency units)

		Producers
		Specialist producers
		Government producers	Other specialist producers	Non-specialist producers	Own-account producers	Total
Output of environmental protection specific services		3 000	6 500	2 400	1 600	13 500
Intermediate consumption		2 000	3 000	600	400	6 000
	Environmental protection specific services	1 800	1 500	500	300	4 100
	Other goods and services	200	1 500	100	100	1 900
Gross value added		1 000	3 500	1 800	1 200	7 500
	Compensation of employees	600	2 000	1 200	800	4 600
	Taxes less subsidies on production
	Consumption of fixed capital	400	1 000	600	400	2 400
Net operating surplus			500			500
Supplementary items
	Labour input (hours worked)	4 000	10 000	4 500	4 000	22 500
	Gross fixed capital formation	1 100	1 000	2 000	500	4 600
	Acquisition less disposals of non-produced, non-financial assets		200

View Table

Table 4.2.

Production of environmental protection specific services

(currency units)

		Producers
		Specialist producers
		Government producers	Other specialist producers	Non-specialist producers	Own-account producers	Total
Output of environmental protection specific services		3 000	6 500	2 400	1 600	13 500
Intermediate consumption		2 000	3 000	600	400	6 000
	Environmental protection specific services	1 800	1 500	500	300	4 100
	Other goods and services	200	1 500	100	100	1 900
Gross value added		1 000	3 500	1 800	1 200	7 500
	Compensation of employees	600	2 000	1 200	800	4 600
	Taxes less subsidies on production
	Consumption of fixed capital	400	1 000	600	400	2 400
Net operating surplus			500			500
Supplementary items
	Labour input (hours worked)	4 000	10 000	4 500	4 000	22 500
	Gross fixed capital formation	1 100	1 000	2 000	500	4 600
	Acquisition less disposals of non-produced, non-financial assets		200

4.55 Specialist producers in the EPEA are establishments whose primary activity is the production of environmental protection specific services. Non-specialist producers are those establishments that produce environmental protection specific services as secondary output but have a different primary activity. The EPEA does not present information on the producers of other environmental goods and services.

4.56 The table shows output of environmental protection specific services and goes on to show a full range of production-related variables including intermediate consumption, value added, and compensation of employees. Where possible, the intermediate consumption of these producers should be split into the intermediate consumption of environmental protection specific services and the intermediate consumption of other goods and services.

4.57 An additional entry is made for gross fixed capital formation and acquisitions less disposals of non-produced, non-financial assets (such as land) used in the production of environmental protection specific services. Gross fixed capital formation targeted towards the production of specific services of specialist as well as other producers should be included.

4.58 All of the values in table 4.2 are measured in a manner consistent with the accounting conventions of the SNA. Consequently, aggregates such as gross value added and net operating surplus can be meaningfully compared with macroeconomic aggregates such as gross domestic product (GDP) as derived from the core national accounts framework.

4.59 However, it is noted that the inclusion of own-account production extends the range of entries compared with that of the core national accounts and hence measures of output and intermediate consumption will be larger in the EPEA relative to the core accounts than it would be if this activity were not separately identified. For market producers, the valuation of own-account production depends on the nature of the use of the production within the producing unit. If the production is used as part of intermediate consumption, then the output is valued as the sum of intermediate consumption, compensation of employees, other taxes (less subsidies) on production, and consumption of fixed capital. If the production is used as own-account capital formation, the value of output is the sum of the costs as just listed plus a net return on the fixed assets used in production. For non-market producers, such as government units, the output is measured as the sum of costs listed above and, by convention, no net return on fixed assets is included.

Supply and use of environmental protection specific services

4.60 The production of environmental protection specific services is supplemented by imports in order that a measure of total supply may be obtained. Total supply is used by other economic units in the economy and may also be exported. These flows are recorded in table 4.3. The top half of the table, the supply table, shows the supply of specific services from the output of resident producers and from imports, and the link between the output of specific services valued at basic prices and the valuation of this output at purchasers’ prices. This follows the standard valuation relationships as described in chapter II.

Table 4.3.

Supply and use of environmental protection specific services

(currency units)

Table 4.3.

Supply and use of environmental protection specific services

(currency units)

Supply table
	Output at basic prices	Taxes less subsidies on products	Trade and transport margins	Output at purchasers’ prices		Imports	Total supply
Environmental protection specific services	13 500	270		13 770			13 770
Use table
	Intermediate consumption		Final consumption		Gross fixed capital formation
	Specialist producers	Other producers	Households	Government		Exports	Total use
Environmental protection specific services	1 500	7 400	2 970	1 800	100		13 770

View Table

Table 4.3.

Supply and use of environmental protection specific services

(currency units)

Supply table
	Output at basic prices	Taxes less subsidies on products	Trade and transport margins	Output at purchasers’ prices		Imports	Total supply
Environmental protection specific services	13 500	270		13 770			13 770
Use table
	Intermediate consumption		Final consumption		Gross fixed capital formation
	Specialist producers	Other producers	Households	Government		Exports	Total use
Environmental protection specific services	1 500	7 400	2 970	1 800	100		13 770

4.61 In the second half of the table, the use table, the total supply of specific services is shown as: (a) intermediate consumption by either specialist or other producers, (b) final consumption by households or governments, (c) gross fixed capital formation or (d) exports to the rest of the world. All entries in the use table are in purchasers’ prices.

Expenditure for environmental protection purposes

4.62 Table 4.4 constitutes a table relevant for the assessment of expenditure for environmental protection purposes. The scope of information on expenditure for environmental protection purposes is not limited to the use of environmental protection specific services as presented in table 4.3. The scope covers expenditure on all goods and services used for environmental protection, including (a) expenditure on environmental protection specific services; (b) expenditure on environmental protection connected products; and (c) expenditure on adapted goods.

Table 4.4

Total national expenditure on environmental protection

(currency units)

Note: Dark grey cells are null by definition. “NI” means “not included in the derivation of total national expenditure on environmental protection”.

^a Non-profit institutions serving households.

Table 4.4

Total national expenditure on environmental protection

(currency units)

		Users
		Industry
		Producers of environmental protection specific services
		Specialist producers	Non-spe cialist and own-account producers	Other producers	Households	General government	NPISH a	Total
Type of expenditure by product
Environmental protection specific servicess
	Intermediate consumption	NI	4000	3400				7400
	Final consumption				2 970	1 800		4770
	Gross fixed capital formation	NI		100				100
Connected products
	Intermediate consumption	NI		200				200
	Final consumption
	Gross fixed capital formation	NI
Adapted goods
	Intermediate consumption	NI
	Final consumption				600			600
	Gross fixed capital formation	NI
Capital formation for characteristic activities		2100	2500					4600
Transfers for environmental protection not included above
Environmental protection transfers to and from the rest of the world (net)						200		200
Total national expenditure on environmental protection		2100	6500	3700	3570	2000		17870

Note: Dark grey cells are null by definition. “NI” means “not included in the derivation of total national expenditure on environmental protection”.

^a Non-profit institutions serving households.

View Table

Table 4.4

Total national expenditure on environmental protection

(currency units)

		Users
		Industry
		Producers of environmental protection specific services
		Specialist producers	Non-spe cialist and own-account producers	Other producers	Households	General government	NPISH a	Total
Type of expenditure by product
Environmental protection specific servicess
	Intermediate consumption	NI	4000	3400				7400
	Final consumption				2 970	1 800		4770
	Gross fixed capital formation	NI		100				100
Connected products
	Intermediate consumption	NI		200				200
	Final consumption
	Gross fixed capital formation	NI
Adapted goods
	Intermediate consumption	NI
	Final consumption				600			600
	Gross fixed capital formation	NI
Capital formation for characteristic activities		2100	2500					4600
Transfers for environmental protection not included above
Environmental protection transfers to and from the rest of the world (net)						200		200
Total national expenditure on environmental protection		2100	6500	3700	3570	2000		17870

Note: Dark grey cells are null by definition. “NI” means “not included in the derivation of total national expenditure on environmental protection”.

^a Non-profit institutions serving households.

4.63 The expenditure may relate to intermediate consumption, final consumption or gross fixed capital formation. There is potential for gross fixed capital formation to be recorded for environmental protection specific services, for example, for environmental protection research and development (R&D) (to the extent that the R&D is considered capital formation in the SNA) or in cases where the expenditure leads to improvements in land which, following the SNA, are treated as gross fixed capital formation in land improvements. Exports are not included in table 4.4, as they represent expenditure by non-resident economic units.

4.64 In addition, the table includes the total gross fixed capital formation and acquisitions less disposals of non-produced, non-financial assets by specialist and other producers for the purposes of producing environmental protection specific services. Finally, the table includes subsidies and similar transfers to the extent that they are not included in the value of goods and services already recorded (e.g., subsidies that reduce the market price of products are added back in, and transfers to and from the rest of the world are included).

4.65 Environmental protection specific services have been defined above. Environmental protection connected products are products whose use directly serves environmental protection purposes but which are not environmental protection specific services or inputs into characteristic activities. Examples of connected products include septic tanks, maintenance services and other products for septic tanks, catalytic converters for vehicles, trash bags, bins, rubbish containers and compost containers.

4.66 For connected products, it is important to understand the production arrangements taking place within a country. For example, when estimating the expenditure associated with the use of bins, wheeled rubbish containers, etc., those purchased by households should be treated as connected products but those that are purchased by specialist producers engaged in collecting waste should not be treated as connected products but, instead, should be included in the intermediate consumption or gross fixed capital formation of the specialist producers.

4.67 Adapted goods are goods that have been specifically modified to be more “environmentally friendly” or “cleaner” and whose use is therefore beneficial for environmental protection. Examples of adapted goods include desulphurized fuels, mercury-free batteries and CFC-free products. Only the extra costs paid in order to acquire adapted goods are considered environmental protection expenditure. Some specific difficulties in measuring adapted goods are discussed further below.

4.68 In table 4.4, all resident users of environmental protection goods and services are included. These comprise producers of environmental protection specific services, other producers, households, general government and non-profit institutions serving households. In this table, the entries in the columns for households, general government, and non-profit institutions serving households relate only to their consumption of environmental protection products. Any production of environmental protection products by these institutional sectors, including own-account production, should be included in the relevant industry column.

4.69 While table 4.4 provides the broad framework for the calculation of total national expenditure on environmental protection, a number of factors need to be considered.

(a) Measurement of gross fixed capital formation

4.70 The expenditure on assets by specialist producers and other producers required for the production of environment specific services are recorded separately. To the extent that specialist producers engage in no significant non-environmental protection activities, all of their expenditure on assets, including the purchase of fixed assets to undertake the production and the acquisition less disposal of non-produced, non-financial assets, particularly land, is within scope of environmental protection expenditure. The inclusion of all expenditure on assets does not apply to non-specialist or own-account producers.

4.71 As the gross fixed capital formation for characteristic activities by specialist, non-specialist and own-account producers is recorded in a separate row in table 4.4, in principle, any such expenditure that includes purchases of environmental protection goods and services should not be counted a second time. For specialist producers, the cell for gross fixed capital formation on environmental protection goods and services is labelled “NI” (not included) in table 4.4. For non-specialist and own-account producers, such expenditure should also be counted only once.

4.72 For non-specialist and own-account producers, two particular types of gross fixed capital formation for environmental protection can be distinguished:

• (a) Expenditure on “end-of-pipe” technologies used to treat, handle or dispose of emissions and wastes from production. This type of expenditure is normally easily identified even within the context of own-account activity because it is usually directed towards an “add on” technology which removes, transforms or reduces emissions and discharges at the end of the production process;

• (b) Expenditure on “integrated” investments, also called cleaner technologies. These are new or modified production facilities designed to ensure that environmental protection is an integral part of the production process, thereby reducing or eliminating emissions and discharges and thus the need for end-of-pipe equipment.

4.73 Depending on the nature of the integrated investment, expenditure can be estimated based on the cost of the modification of existing equipment or on the extra cost due to pollution control, energy savings and the like (i.e., the cost of “non-polluting or less-polluting” equipment is compared with that of “polluting or more-polluting” reference equipment). It is noted that estimating the expenditure on integrated investments requires consideration of the general concerns in respect of measuring adapted goods, as described below.

(b) Measurement of adapted goods

4.74 While the general concept of adapted goods can be explained, there are significant measurement challenges in compiling estimates of adapted goods. The primary difficulty is that adapted goods must be defined in reference to a base or equivalent normal good. With this normal good in mind, it can be determined whether another similar good is cleaner or more environmentally friendly. Such assessments are difficult to make when reference goods no longer exist or when new goods present other advantages in addition to their beneficial effects on the environment. These advantages may include savings on, or substitution of, raw materials and higher productivity, which cannot be isolated in terms of cost.

4.75 The steady integration of environmental standards into equipment and processes makes it more difficult over time to distinguish between a cleaner good and the equivalent normal good. Given the variety of speeds at which new environmental standards are incorporated into different types of equipment in different countries, the ability to make comparisons of long time-series across industries and countries may be limited.

4.76 Once a set of adapted goods has been defined, the appropriate value of expenditure needs to be determined. For the EPEA, only the net or extra cost of the adapted goods is included since from the perspective of the purchaser, it is only the extra cost that is considered to represent the amount spent for environmental protection purposes.

4.77 Typically, the method used to estimate the expenditure associated with the purchase of adapted goods is based on physical information about market size (e.g., the amount of desulphurized fuels used). These estimates are then valued by the extra costs associated with environmental protection features. As extra costs can be difficult to survey directly, expert assessment and technical knowledge may be used to estimate them (e.g., the extra costs of producing desulphurized fuels or environmental adaptations of vehicles).

4.78 While these measurement difficulties do exist, a misleading picture of expenditure for environmental protection purposes would result if the value of adapted goods was ignored. To support the measurement of adapted goods, lists of relevant products have been developed to form a basis for that measurement.³⁰ Although many adapted goods may exist, experience from countries that have compiled an EPEA suggests that only a few are quantitatively important and involve significant extra costs. Indeed, for many adapted goods, no extra costs exist.

(c) Accounting for intermediate consumption

4.79 In general terms, intermediate consumption is equal to the expenditure on goods and services by establishments in the production of their output. The intermediate consumption of other producers recorded in table 4.4 therefore reflects the purchase of environmental protection goods and services (including specific services, connected products and adapted goods) as part of their production of other goods and services. These environmental protection goods and services are either supplied by specialist or non-specialist producers, or imported.

4.80 For own-account producers, their output of environmental protection goods and services is valued as the sum of the costs of producing the output. These costs will include the purchase of a range of goods and services (as intermediate consumption) as well as associated salaries and consumption of fixed capital. The amount to be recorded as intermediate consumption of environmental protection specific services by the producers in the column for non-specialist and own-account producers in table 4.4 is the total value of own-account output, since this is the amount that represents the value of the intermediate consumption of environmental protection services in the main activity of the establishment.

4.81 For specialist and non-specialist producers, since their output is sold to other establishments, the costs of producing the output, including intermediate consumption, do not need to be recorded separately, since the value is captured in the expenditure on environmental protection goods and services by other units.

4.82 Special consideration is required concerning the intermediate consumption of environmental protection goods and services. For specialist producers, in order to prevent double-counting, the intermediate consumption of environmental protection goods and services must be excluded from total national expenditure on environmental protection, as it is also included in the expenditure of other units purchasing the environmental protection specific services from specialist producers. Hence, the relevant cells for intermediate consumption of environmental protection goods and services by specialist producers are labelled “NI” (not included) in table 4.4.

4.83 In principle, this adjustment should also be made in relation to the intermediate consumption of environmental protection goods and services used by non-specialist and own-account producers, to the extent that these products are used as inputs into characteristic activities, i.e., they are used for own-account activities or to produce and sell environmental protection goods and services on the market. In practice, it is assumed that these uses are not significant; therefore, this adjustment is not necessary for non-specialist and own-account producers.

(d) Adjustments for transfers and financing by the rest of the world

4.84 There may be transfers between economic units that affect the level of spending on environmental protection but are not recorded in the earlier categories of expenditure shown in table 4.4. For example, if government subsidizes some environmental protection expenditure, then the extent of this subsidy will not be shown at purchasers’ prices in the expenditure recorded. Generally, these transfers relate to subsidies on production and, in many countries, are not significant flows within the EPEA. It is noted that significant transfers may also be paid to and received from the rest of the world. Entries related to these transfers are recorded in the relevant rows at the bottom of table 4.4.

(e) Total national expenditure on environmental protection

4.85 With these considerations in mind, total national expenditure on environmental protection is defined as:

• Final consumption, intermediate consumption, and gross fixed capital formation on all environmental protection goods and services (specific services, connected products and adapted goods), except intermediate consumption and gross fixed capital formation for characteristic activities

• Plus gross fixed capital formation (and acquisition less disposal of non-produced, non-financial assets) for environmental protection characteristic activities

• Plus environmental protection transfers by resident units not captured in the items above

• Plus environmental protection transfers paid to the rest of the world;

• Less environmental protection transfers received from the rest of the world

Financing environmental protection

4.86 The estimates of national expenditure on environmental protection show expenditure as undertaken by different users, but may not show who is the direct bearer of the cost because of environmental protection transfers between units. Such information, however, provides valuable insight regarding the source of the funds that finance national expenditure on environmental protection and regarding how changing financing structures may influence expenditure decisions. For example, if an investment grant for environmental protection is not available, an enterprise may be much less likely to undertake the investment in environmental protection technology and processes.

4.87 The expenditure undertaken by the users shown in table 4.4 can be cross-classified to show which units are directly responsible for the expenditures and which bear directly the costs of financing them. This is shown in table 4.5. For both current and capital transfers related to environmental protection, the unit making the transfer has an increase in expenditure and the unit receiving the transfer has a reduction.

Table 4.5.

Financing of national expenditure on environmental protection

(currency units)

^a Non-profit institutions serving households.

Table 4.5.

Financing of national expenditure on environmental protection

(currency units)

			Users
			Producers of environmental protection specific services
Finnancing units			Specialist producers	Non-specialist and own-account producers	Other producers	Households	Government	NPISHa	Rest of the world	Total
	Government		1300	1100			1700		300	4400
	Corporations
		Specialist producers	800	5400						6200
		Other producers			3700					3 700
	Households					3 570				3 570
	National expenditure		2100	6500	3700	3570	1700		300	17870
	Rest of the world						100			100
	Total uses of resident units		2100	6 500	3700	3570	1800		300	17970

^a Non-profit institutions serving households.

View Table

Table 4.5.

Financing of national expenditure on environmental protection

(currency units)

			Users
			Producers of environmental protection specific services
Finnancing units			Specialist producers	Non-specialist and own-account producers	Other producers	Households	Government	NPISHa	Rest of the world	Total
	Government		1300	1100			1700		300	4400
	Corporations
		Specialist producers	800	5400						6200
		Other producers			3700					3 700
	Households					3 570				3 570
	National expenditure		2100	6500	3700	3570	1700		300	17870
	Rest of the world						100			100
	Total uses of resident units		2100	6 500	3700	3570	1800		300	17970

^a Non-profit institutions serving households.

4.88 Many of the environmental protection transfers will be subsidies or investment grants where the government is the payer of the transfers and it is industries, households or NPISH that benefit. An example of a transfer benefiting households is a grant to improve house insulation. In these cases, the expenditure is shown against the government who is providing the funding rather than against the user or beneficiary.

4.89 Another type of financing arrangement for which an adjustment can be made concerns earmarked taxes. Earmarked taxes are recorded where a direct link exists between the tax revenue collected and expenditure on particular projects. Where the expenditure is for environmental protection purposes, the amount financed by earmarked taxes should be shown as being financed by the units paying the taxes.³¹

4.90 Relevant financing flows concerning the rest of the world correspond to the transfers for international cooperation in the field of environmental protection. These transfers can be financed either by the government, international organizations, corporations or by households through non-governmental organizations.

4.91 Making adjustments for these forms of transfers provides information on the source of funds but does not completely determine who ultimately bears the cost of environmental protection. Costs that are initially borne by enterprises are eventually passed on to their customers. This applies to both intermediate consumption and the costs of new capital formation. Further, all government expenditure is funded (at least in large part) by taxes and thus the cost is ultimately borne by those paying the taxes. However, further adjustments with a view to examining the net cost burden of environmental protection are not considered in the SEEA.

Purpose of the EGSS statistics

4.92 The environmental goods and services sector (EGSS) considers environmental activities from the supply perspective and EGSS statistics present information on the production of environmental goods and services in as much detail as possible. This information is important in understanding the economic response to the challenges of environmental degradation and the depletion of natural resources. EGSS statistics provide indicators of the production of environmental goods, services and technologies; the contribution of this production within the economy as a whole; and the extent of related employment, investment and exports from the sector.

4.93 EGSS statistics also provide an information source for assessing (a) the potential for economic activity and employment to be based on environmentally friendly and more resource-efficient activities and (b) the extent to which the economy is responding to various public policies and initiatives that have this objective in mind. Defining these statistics in an internationally comparable way also permits cross-country comparison and assessment of best practice. EGSS statistics may also provide valuable source data for the EPEA or resource management expenditure accounts.

4.94 In principle, there is a wide range of economic variables that might be considered within an EGSS context but, owing to the complexity of measurement in this area, focus in the Central Framework is on the variables that give an indication of the relative economic size and contribution of the EGSS. Thus, the main variables included are the output, value added, employment, exports, and gross fixed capital formation related to the production of environmental goods and services. At this stage, a full functional account for the EGSS has not been defined.

Scope and definition of the EGSS

4.95 The EGSS consists of producers of all environmental goods and services. Thus, all products that are produced, designed and manufactured for purposes of environmental protection and resource management are within scope of the EGSS. This aligns with the intent of the EGSS to provide information on the extent to which the economy may become more environmentally friendly and resource-efficient. The types of environmental goods and services in scope of the EGSS are environmental specific services, environmental sole-purpose products, adapted goods and environmental technologies. The definitions of these goods and services are outlined directly below.

4.96 The first type of environmental goods and services in the EGSS is environmental specific services. These services comprise environmental protection and resource management products that are “characteristic” or typical of those activities. Hence, environmental specific services are environmental protection and resource management specific services produced by economic units for sale or own use. Examples of environmental specific services are waste and wastewater management and treatment services, and energy and water-saving activities.

4.97 Consistent with the definition of environmental protection and resource management activities (see sect. 4.2), environmental specific services are those services that have the main purpose of:

• (a) Preventing or minimizing pollution, degradation or natural resources depletion (including the production of energy from renewable sources);

• (b) Treating and managing pollution, degradation and natural resource depletion;

• (c) Repairing damage to air, soil, water, biodiversity and landscapes;

• (d) Carrying out other activities such as measurement and monitoring, control, research and development, education, training, information and communication related to environmental protection or resource management.

4.98 The second type of environmental goods and services is environmental sole-purpose products. Environmental sole-purpose products are goods (durable or non-durable) or services whose use directly serves an environmental protection or resource management purpose and that have no use except for environmental protection or resource management. Examples of these products include catalytic converters, septic tanks (including maintenance services), and the installation of renewable energy production technologies (e.g., solar panels).

4.99 The third type of environmental goods and services is adapted goods. Adapted goods are goods that have been specifically modified to be more “environmentally friendly” or “cleaner” and whose use is therefore beneficial for environmental protection or resource management. For the purposes of the EGSS, adapted goods are either:

(a) “Cleaner” goods, which help to prevent pollution or environmental degradation because they are less polluting at the time of their consumption and/or scrapping, compared with equivalent “normal” goods. Equivalent normal goods are goods that provide similar utility except for the impact on the environment. Examples include mercury-free batteries and cars or buses with lower air emissions;

(b) “Resource-efficient” goods, which help to prevent natural resource depletion because they contain fewer natural resources in the production stage (e.g., recycled paper and renewable energy, heat from heat pumps and solar panels); and/or in the use stage (e.g., resource-efficient appliances and water-saving devices such as tap filters).

4.100 Adapted goods differ from environmental specific services and sole-purpose products because, while they serve an environmental protection or resource management purpose (through being cleaner or more resource-efficient), these are not the primary reasons for their production (e.g., the primary purpose for manufacturing buses with lower air emissions is transportation).

4.101 Compared with the definition of adapted goods in the EPEA, the scope of adapted goods in the EGSS is broader through the inclusion of goods beneficial for resource management and also because the full value of adapted goods is included rather than only the extra cost compared with that of the equivalent normal good. A consequence of these differences is that the number of adapted goods within scope of the EGSS is much larger. Some of the difficulties in measuring adapted goods as described in section 4.3.2 apply equally in the EGSS context.

4.102 The fourth type of goods and services is environmental technologies. Environmental technologies are technical processes, installations and equipment (goods), and methods or knowledge (services), whose technical nature or purpose is environmental protection or resource management. Environmental technologies can be classified as either:

(a) End-of-pipe (pollution treatment) technologies, which are mainly technical installations and equipment produced for measurement, control, treatment and restoration/correction of pollution, environmental degradation, and/or resource depletion. Examples include plants within which to treat sewage, equipment for measuring air pollution, and facilities for the containment of high-level radioactive waste;

(b) Integrated (pollution prevention) technologies, which are technical processes, methods or knowledge used in production processes that are less polluting and less resource-intensive than the equivalent “normal” technology used by other producers. Their use is less environmentally harmful than that of relevant alternatives.

4.103 Note that some environmental technologies may be included in the earlier categories of sole-purpose products or adapted goods.

4.104 Excluded from the scope of environmental goods and services are goods and services produced for purposes that, while beneficial to the environment, primarily satisfy technical, human and economic needs or that are requirements for health and safety. Goods and services related to minimizing the impact of natural hazards and those related to the extraction, mobilization and exploitation of natural resources are also excluded.

4.105 In practice, the measurement of environmental sole-purpose products and adapted goods relies on the development of lists of relevant goods and services. For sole-purpose products, the purpose of goods or services is predominantly determined based on the technical nature of the product and its technical suitability for use in environmental protection or resource management. In certain boundary cases, where the technical nature of the product does not provide a definitive guide, consideration may be given to the intent of the producer of the product. For adapted goods, the lists are formed without reference to the primary purpose of the good but are formed based on an assessment of whether, by virtue of its technical nature, the good is environmentally friendly or cleaner.

4.106 Many of the products supplied by the EGSS are also recorded in the EPEA, described in section 4.3.2. The EPEA can be an important data source for the EGSS (and vice versa) and, in principle, the two systems can be fully reconciled. A reconciliation would need to take into account, for example, that the EPEA includes all of the gross fixed capital formation for environmental protection characteristic activities but that not all of the products used for this gross fixed capital formation can be identified as being specifically manufactured for environmental purposes in the EGSS. Hence, the EGSS output of capital goods designed for environmental protection will differ from the total gross fixed capital formation recorded in the EPEA. In practice, a full reconciliation is a complex operation that is rarely achieved.

4.107 In the EGSS, specialist producers are those producers whose primary activity is the production of environmental goods and services, including specific services, sole-purpose products, adapted goods and environmental technologies. This scope is broader than the scope of specialist producers in the EPEA which is limited to producers whose primary activity is the production of environmental protection specific services.

4.108 Government producers are separately recorded as an important type of specialist producer. Non-specialist and own-account producers, including households, are also separately identified in the EGSS. Own-account production is measured following the treatment outlined in section 4.2.

4.109 Because of the production focus of EGSS statistics, there may be interest in structuring information by type of economic activity following ISIC or by institutional sector (corporations, government, households, non-profit institutions serving households).

Statistics on the EGSS

4.110 The basic structure of statistics concerning the EGSS follows the format presented in table 4.6. Each type of output of environmental goods and services may also be classified, following the relevant parts of the Classification of Environmental Activities, by allocating the value of output to relevant classes of environmental protection activity or resource management activity.

Table 4.6.

Environmental goods and services sector

(currency units)

Table 4.6.

Environmental goods and services sector

(currency units)

			Producers
			Specialist producers
			Government producers	Other specialist producers	Non-specialist producers	Own-account producers
Output of environmental goods and services
	Environmental specific services	Environmental protection	3000	6500	2400	1600
		Resource management	3100	4500	300	1600
	Sole-purpose products	Environmental protection			250
		Resource management			400
	Adapted goods	Environmental protection			1000
		Resource management			3000
	End-of-pipe technologies	Environmental protection	100	200	1200	100
		Resource management	100	300	1500
	Integrated technologies	Environmental protection			800
		Resource management			700
	Total environmental goods and services produced		6300	11500	11550	3300
Intermediate consumption			3800	6500	6700	1450
Gross value added			2500	5000	4850	1850
Compensation of employees			2100	4200	4300	1500
Gross fixed capital formation			1500	1820	1500	590
Exports of environmental goods and services				200	2300
Employment (thousands of people)			120	210	220	80

View Table

Table 4.6.

Environmental goods and services sector

(currency units)

			Producers
			Specialist producers
			Government producers	Other specialist producers	Non-specialist producers	Own-account producers
Output of environmental goods and services
	Environmental specific services	Environmental protection	3000	6500	2400	1600
		Resource management	3100	4500	300	1600
	Sole-purpose products	Environmental protection			250
		Resource management			400
	Adapted goods	Environmental protection			1000
		Resource management			3000
	End-of-pipe technologies	Environmental protection	100	200	1200	100
		Resource management	100	300	1500
	Integrated technologies	Environmental protection			800
		Resource management			700
	Total environmental goods and services produced		6300	11500	11550	3300
Intermediate consumption			3800	6500	6700	1450
Gross value added			2500	5000	4850	1850
Compensation of employees			2100	4200	4300	1500
Gross fixed capital formation			1500	1820	1500	590
Exports of environmental goods and services				200	2300
Employment (thousands of people)			120	210	220	80

4.111 The size of the EGSS is not equal to the total output of all of the producers within scope of the EGSS. Most EGSS producers will also produce a range of other goods and services and therefore the production of environmental goods and services may be only a relatively small component of their total output. This may be recognized through inclusion of data on the total output of other goods and services and derivation of the share of environmental goods and services in total output.

4.112 All variables are measured following standard national accounts conventions and principles. Variables other than output, such as intermediate consumption, gross value added, compensation of employees, employment, gross fixed capital formation and exports, should reflect amounts related only to an establishment’s production of environmental goods and services. Where direct estimates of these variables with respect to the production of environmental goods and services cannot be obtained, an estimation approach can be utilized, which entails multiplying the estimate of the variable (e.g., total intermediate consumption) by the output share for environmental goods and services. Since this assumes that the production function of the producer is the same for environmental goods and services and other goods and services, estimates obtained using this approach should be assessed in conjunction with expert advice, as available. This is particularly the case with regard to estimates of gross fixed capital formation, since the relationship between patterns of investment and the output of environmental goods and services may vary considerably.

Environmental subsidies and similar transfers

4.138 An environmental subsidy or similar transfer is a transfer intended to support activities that protect the environment or reduce the use and extraction of natural resources. It includes those transfers defined by the SNA as subsidies, social benefits to households, investment grants and other current and capital transfers.³³ More specifically:

• Subsidies are current unrequited payments that government units, including nonresident government units, make to enterprises on the basis of the levels of their production activities or the quantities or values of the goods and services that they produce, sell or import.

• Social benefits to households are current transfers received by households that are intended to provide for the needs that arise from certain events or circumstances, for example, sickness, unemployment, retirement, housing, education or family circumstances.

• Investment grants consist of capital transfers made by governments to other resident units or non-resident units to finance all or part of the costs of their acquisition of fixed assets.

• Other current transfers consist of all current transfers between resident institutional units, or between resident and non-resident units, other than current taxes on income, wealth, etc., social contributions and benefits, and social benefits in kind. They include transfers between levels of governments, between general government and foreign governments, and transfers to and from non-profit institutions.

• Other capital transfers consist of all capital transfers except capital taxes and investment grants. Examples include transfers from central government to units at lower levels of government; and legacies, large gifts and donations by households or enterprises to non-profit institutions intended to finance the purchase of fixed assets.

4.139 Determination of whether a particular transfer by government is environmental is based on consideration of the purpose of the transfer. From an analytical perspective, the primary focus is to determine how much expenditure is being allocated towards achieving environmental outcomes. Thus, a subsidy or similar transfer should be treated as environmental when the primary intent or purpose of the government is for resources to be used for either environmental protection or resource management purposes.

4.140 In principle, a decision on whether the primary purpose of a transfer is environmental should be made for each individual transfer. Then, once a decision on the primary purpose has been made, the total value of the transfer is treated as being for that primary purpose.

4.141 In practice, information on transfers by government is usually contained in budget and other government expenditure data. Generally, these data do not show individual transactions and more commonly will provide information by type of government programme, thus including a large number of individual transfers. It will usually be the case that such programmes have multiple purposes and hence determining the number and value of individual transfers that have a primary purpose of environmental protection or resource management may require additional information.

4.142 In these situations, it may be necessary to estimate the share of the value of transfers for a given government programme that reflects the value of individual transfers within the programme that have environmental protection or resource management as their primary purpose.

4.143 The determination of primary purpose should not be based on whether the use of the resources by the recipient of the transfer results in positive outcomes for the environment. While it is reasonable to consider that the purpose of the government in making the transfer and the purpose of the recipient are the same, it may not be the case that the expenditure of the transferred resources results in beneficial environmental outcomes, even if this was the intent.

4.144 For analytical purposes, an aggregate measure of these different payments may be compiled. The aggregate measure of environmental subsidies and similar transfers paid by government is the summation of all those types of transfers listed above that are considered to be environmental, based on the primary purpose of the payment.

(a) Classification of environmental subsidies and similar transfers

4.145 Since the definition of environmental subsidies and similar transfers is based on the assessment of environmental protection and resource management purposes, then, in principle, it is possible to classify these transfers using the Classification of Environmental Activities (CEA), part I (Environmental protection activities), and part II (Resource management activities). However, given the multipurpose nature of these transfers, fine levels of disaggregation may be difficult to compile in practice.

4.146 For accounting and analytical purposes, it is necessary to separate the transfers into those of a current and those of a capital nature following the definitions in the SNA.³⁴ It may also be useful to classify the transfers by the industry or institutional sector of the recipients following ISIC or standard SNA institutional sector classifications.

(b) Potentially environmentally damaging subsidies

4.147 The definition of environmental subsidies and similar transfers focuses on the government’s intention rather than on the effect on the environment arising from the use of the resources provided. Another perspective that may be taken is whether the size and structure of payments from governments are environmentally beneficial or environmentally damaging. A measure reflecting this perspective is the potentially environmentally damaging subsidy (PEDS), encompassing subsidies and similar transfers that support activities that are considered environmentally damaging. In some definitions, this measure also includes so-called implicit (or indirect) subsidies, such as preferential tax rates. A definition of PEDS is not included in the SEEA.

Environmental taxes

4.148 The majority of the different payments made to government are taxes. Taxes may be labelled in different ways and thus care must be taken to ensure that the underlying basis of the payment is well understood.

4.149 Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units.³⁵ They are grouped in the following categories:

• (a) Taxes on products, which are taxes payable per unit of some good or service. Taxes on products include value added type taxes, taxes and duties on imports, and export taxes;

• (b) Other taxes on production, which comprise all taxes except taxes on products that enterprises incur as a result of engaging in production. Examples include taxes payable on land, fixed assets or labour employed in the production process;

• (c) Taxes on income, which are taxes on incomes, profits and capital gains;

• (d) Other current taxes, which are current taxes on capital and miscellaneous current taxes (such as payments by households to obtain certain licences);

• (e) Capital taxes, which are taxes levied at irregular and infrequent intervals on the values of assets or net wealth owned by institutional units or on the values of assets transferred between institutional units as a result of legacies, gifts inter vivos or other transfers.

4.150 The decision on whether a payment regarded by the SNA as a tax is environmental is based on consideration of the tax base. Specifically, an environmental tax is a tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific, negative impact on the environment. In practice, this definition is applied by looking at all of the various taxes levied in a country and making an assessment regarding whether the tax base in each circumstance is something that has a negative environmental impact.

4.151 Since the application of this definition may vary across countries, for the purposes of international comparison of environmental taxes, lists of relevant tax bases that satisfy this definition have been developed by the Organization for Economic Cooperation and Development and Eurostat.³⁶

4.152 The consideration of the tax base in the determination of the environmental status of a tax is an exception to the general approach to defining the environmental status on the basis of the purpose of the transaction. However, in the case of taxes, generally the taxpayer does not know in advance what the tax payment might be used for by the government, nor are the reasons for levying a tax, as stated by the legislator, a reliable basis for international comparisons. The primary purpose of taxation may sometimes be to create incentives to reduce environmental pressures, or to raise revenue for the purpose of financing environmental protection. However, in many cases, the specific reason may not be stated and often the primary purpose of taxation will be the raising of funds to pay for general social services such as health and education.

4.153 In cases where the use of the tax revenue is known, these taxes are considered “earmarked taxes”. Those taxes that are earmarked for environmental protection are relevant in the calculation of environmental protection expenditure and are discussed in section 4.3.

4.154 The approach taken to the definition of environmental taxes in the SEEA differs from the approach commonly found in the economics literature, where environmental taxes are defined with reference to taxing negative externalities, i.e., Pigovian taxes. These types of taxes are based on an assessment of the motive for setting rates of tax, i.e., the extent to which a particular tax rate will reduce the negative externality. Pigovian taxes do not include taxes collected for fiscally motivated reasons. Since determining the precise motivation for taxation involves a difficult measurement issue, the approach in the SEEA is to consider the underlying tax base.

(a) Environmental tax bases and categories

4.155 There are four broad categories into which environmental taxes are generally grouped: energy, transport, pollution and resources, described below:

• (a) Energy taxes:

  • (i) This category includes taxes on energy products used for both transport and stationary purposes. Taxes on fuel used for transport purposes should be shown as a separate subcategory of energy taxes. Energy products for stationary use include fuel oils, natural gas, coal and electricity;

  • (ii) Taxes on carbon are included under energy taxes rather than under pollution taxes. If they are identifiable, carbon taxes should be reported as a separate subcategory within energy taxes. A special type of carbon taxes are payments for tradable emissions permits. The treatment of payments for these permits is discussed later in this section;

• (b) Transport taxes. This category includes mainly taxes related to the ownership and use of motor vehicles. Taxes on other transport equipment (e.g., planes), and related transport services (e.g., duties on charter or scheduled flights) are also included here, as are taxes related to the use of roads. The transport taxes may be “one-off” taxes related to imports or sales of the equipment or recurrent taxes such as an annual road tax. Taxes on petrol, diesel and other transport fuels are included under energy taxes;

• (c) Pollution taxes. This category includes taxes on measured or estimated emissions to air and water, and the generation of solid waste. Taxes on carbon are an exception and are included under energy taxes, as discussed above. Taxes on sulphur are included here;

• (d) Resource taxes. This category typically includes taxes on water abstraction, extraction of raw materials and other resources (e.g., sand and gravel). Consistent with the general scope of environmental taxes, payments to government for the use of land or natural resources are treated as rent and are therefore excluded from resource taxes. For a detailed discussion of the treatment of rent, see paragraphs 4.160-4.163.

4.156 Table 4.9 shows a possible recording of environmental taxes by type of tax. The types of taxes in the columns follow the higher-level structure of taxes in the SNA. Where other payments to government are of particular significance, they could be added within a table of this type. For some types of environmental taxes, particularly energy taxes, a breakdown of payments by industry may be relevant. Ideally, an industry breakdown should be aligned to the breakdown used for the recording of related physical flows as shown in chapter III. For example, for energy taxes, an industry breakdown following the industry structure of the air emissions accounts may be relevant.

Table 4.9.

Environmental taxes by type of tax

Table 4.9.

Environmental taxes by type of tax

		Type of tax
		Taxes on products	Other taxes on production	Taxes on income
Type of environmental tax				Corporations	Households	Other current taxes	Capital taxes	Total
Energy taxes		10 800	1 500				300	12 600
	Carbon taxes	4600						4600
	Taxes on fuel used for transport	4700						4700
	Other energy taxes	1 500	1 500				300	3 300
Transport taxes		2 600	800			1 400	100	4900
Pollution taxes		400	500			200		1 100
Resource taxes		200	400			300		900
Total environmental taxes		14 000	3 200			1 900	400	19 500
Non-environmental taxes		79 000	15 400	23 000	74 000	5 800	1 600	198 800
Total taxes		93 000	18 600	23 000	74 000	7 700	2 000	218 300
	Share of environmental taxes (percentage)	17.7	20.8	0.0	0.0	32.8	25.0	9.8

View Table

Table 4.9.

Environmental taxes by type of tax

		Type of tax
		Taxes on products	Other taxes on production	Taxes on income
Type of environmental tax				Corporations	Households	Other current taxes	Capital taxes	Total
Energy taxes		10 800	1 500				300	12 600
	Carbon taxes	4600						4600
	Taxes on fuel used for transport	4700						4700
	Other energy taxes	1 500	1 500				300	3 300
Transport taxes		2 600	800			1 400	100	4900
Pollution taxes		400	500			200		1 100
Resource taxes		200	400			300		900
Total environmental taxes		14 000	3 200			1 900	400	19 500
Non-environmental taxes		79 000	15 400	23 000	74 000	5 800	1 600	198 800
Total taxes		93 000	18 600	23 000	74 000	7 700	2 000	218 300
	Share of environmental taxes (percentage)	17.7	20.8	0.0	0.0	32.8	25.0	9.8

(b) Treatment of value added taxes (VAT)

4.157 Generally, value added taxes are excluded from the definition of environmental taxes because it is considered that, unlike other taxes on environmental tax bases, they have no influence on relative prices (i.e., the VAT is levied on a broad range of goods and services regardless of their impact on the environment). This lack of direct influence is also reflected in the deductibility of the VAT for many taxpayers.

4.158 There is one, relatively specific, exception to this general treatment. In principle, where the VAT is calculated on a price that includes a duty or tax already determined to be an environmental tax, the relevant amount of non-deductible VAT (equal to the VAT rate multiplied by the amount of the environmental tax, excluding the part that is deductible by the taxpayer) can also be considered to be part of environmental taxes and classified based on the nature of the underlying tax base. Such a situation may occur when VAT on petrol/gasoline is calculated including the fuel duty paid on hydrocarbon oils. In practice, the ability to isolate this amount of the VAT may require additional information.

Other payments to government

4.159 Only those payments that are considered to be taxes according to the definitions of the SNA are within scope of environmental taxes in the SEEA. At the same time, there may be particular interest in recording other payments to government such as payments of rent, some sales of goods and services, and some fines and penalties. In determining the environmental status of these payments, focus should remain on the basis for the payment rather than on either the name used to describe the payment or the purpose for which the revenue raised may be used. These other types of payments to government are described directly below

(a) Rent

4.160 There are certain environmental assets, particularly mineral and energy resources, that are owned by government and payments to government by extractors are often required. These payments are treated as rent. Payments of rent in respect of mineral and energy resources are commonly referred to as royalties and, in resource-endowed countries, these payments may represent an important component of total government revenue.

4.161 Rent is the income receivable by the owner of an environmental asset for putting the asset at the disposal of another institutional unit. Rent is paid on the use in production of non-produced assets such as land and mineral and energy resources. Rent is distinct from rentals that are paid by users of fixed assets to the owners of those assets. Examples of rentals include payments for the hire of buildings or equipment and payments for the hire of cars for transport by tourists. Rentals are treated as payments for services.

4.162 Rent relates to a payment due for the use of an environmental asset for one accounting period. There may be a longer-term lease permitting the extractor to operate for an extended period of time but the payment of rent is usually set on an annual basis. Payments of rent usually depend on the level of output of the extractor, usually determined on the basis of the value of sales of extracted resource (quantity extracted multiplied by the resource price).

4.163 As the government is the taxation authority, it is possible for different arrangements to be established by which the government collects the rent that is due to it as owner of the environmental asset. Some of these arrangements may be in the nature of taxes on profits, as defined in the SNA. In principle, amounts of taxes on profits that relate to the income earned from the extraction of environmental assets should be treated as rent. In practice, separating the taxes on profits that relate to income from extraction activity as opposed to other income earned by the extracting company may be difficult. Chapter V discusses the estimation of resource rent and the determination of the proportion that accrues to the different economic units.

(b) Sales of goods and services

4.164 In a number of situations, the government undertakes a range of activities that provide goods and services to households and businesses. Such provision of goods and services constitute production by government units and payments that are made by users are often referred to as “fees”. A common situation is the payments made to general government units that operate collection schemes for the disposal of waste. In some cases, making the distinction between these payments as purchases of goods and services and as taxes can be difficult, since it must be determined whether the purchaser has received a service from the government in return for the payment. The general guidance in the SNA should be followed.³⁷

(c) Fines and penalties

4.165 Fines and penalties are distinguished from taxes by being compulsory payments imposed on institutional units by courts of law or quasi-judicial bodies.³⁸ These payments to governments are treated as miscellaneous current transfers. It may well be that some fines and penalties are related to illegal activities of interest, for example, polluting water bodies. The recording of fines and penalties also arises in the case of the use of environmental assets as sinks (see sect. 4.4.5).

Permits to extract and harvest natural resources

4.174 The SNA outlines a range of general considerations that should be taken into account in determining an appropriate treatment.³⁹ Considered below are the relevant issues that arise in the context of different types of natural resources and the common licensing and permit arrangements.

(a) Mineral and energy resources

4.175 Mineral and energy resources differ from other natural resources in that all extraction necessarily reduces the amount of the resource available in the future. The owner (in many but not all circumstances, government) generally does not have a productive activity associated with the extraction and, commonly, payments of rent are made regularly based on the amount of the resource that is extracted. Payments of rent are discussed in paragraphs 4.160-4.163 and the appropriate asset and income account entries in respect of recording the ownership and use of mineral and energy resources are discussed in chapter V, section 5, entitled “Asset accounts for mineral and energy resources”.

(b) Land

4.176 Land (and the associated natural resources) may be sold outright when the legal ownership is transferred from one institutional unit to another. Acquisitions and disposals of land should be recorded in the capital account. Land is also the type of asset most frequently subject to a lease. Commonly, farmers leasing land pay regular rent to the owner of the land and these flows are recorded in the allocation of primary income account.

(c) Timber resources

4.177 It is common for logging to be allowed under strict limits with a fee payable per unit volume of timber removed. The limits are usually such that the harvest of timber satisfies conditions required for a sustainable or long-term yield (among other possible conditions); hence, the payments are recorded as rent in the allocation of primary income account. The acquisition and disposal of forest land, including the value of the timber resources, should be recorded in the capital account.

(d) Aquatic resources

4.178 Fishing quotas established by national and international agreement may be allocated in perpetuity or for extended periods to particular institutional units. In such circumstances, the quotas may be transferable and, if so, there may be a well-developed market for them. Fishing quotas may therefore be considered permits to use a natural resource that are transferable and in these situations, the quotas are considered assets in their own right.

4.179 Under an alternative regime, a permit is issued for a strictly limited period of time, less than a year, to a nominated institutional unit, often a non-resident. This is a common practice in some islands in the South Pacific, for example. In these cases, the revenue from the licences should be recorded as rent in the allocation of primary income account.

4.180 A licence granted to a household for recreational fishing is considered, by convention, as payment of a tax.

(e) Water resources

4.181 A body of water with an economic value can be sold in its entirety either as part of the land that surrounds it or as a separate asset. It is possible that the use of an area of water could be permitted under a long-term arrangement for recreational purposes, for example. The treatment of payments for such arrangements should be the same as that for land. Regular payments for the extraction of water (as opposed to the delivery of it) should be treated as rent.

Permits for the use of the environment as a sink

4.182 The recording of transactions related to the use of the environment as a sink entails a separate set of considerations. Specifically, this relates to the right to use the environment, i.e., the soil, water, air and associated environmental assets, as a sink for emissions from economic activity.

4.183 A number of treatments may apply, depending on the nature of the arrangements. The treatments align with the definitions of the various payments to government outlined above. The following scenarios and treatments are the most common:

• (a) The government may require payments to be made in situations where there are illegal emissions of substances beyond certain levels. If these payments are intended to reduce or inhibit discharges and emissions in the future, they should be treated as fines;

• (b) If the payments are linked to remedial action following the release of the emission or discharge, the payment is treated as a payment for a service, unless the amount charged is out of all proportion to the remedial costs involved, in which case the payment should be treated as a tax;

• (c) If a limited number of permits to discharge or emit are issued with the intent to ultimately restrict the overall quantity of discharges and emissions, the treatment of any payment associated with the permits depends on the ownership of the environmental asset into which the emission has been or will be released:

  • (i) Where an economic asset exists following the principles of the SNA (most commonly, this occurs with land and soil) and the necessary conditions are met concerning the terms on which the discharge is permitted, then the payment for the permit should be treated in the same way as the payment for a licence to use an environmental asset;

  • (ii) Where an economic asset does not exist following the principles of the SNA, then the payment for the permit should be treated as a tax, as is commonly the case with regard to the atmosphere, inland water resources and the seas, and this treatment generally applies to carbon emissions permit schemes.

4.184 In all of these scenarios, it is assumed that the permits issued are not tradable. Thus, the timing of recording of the payments and the economic units involved can be determined in a relatively straightforward manner using standard accounting principles.

4.185 Increasingly, permits are issued that are tradable and there is an active market in them. Permits concerning carbon emissions are the most significant for most countries. The potential to trade the permits generates a range of accounting complexities concerning the timing of recording, the treatment of changes in the value of permits and the specific economic units involved. SNA decisions on the appropriate accounting treatment are followed in the SEEA. The details of the SNA treatment of emissions permits are set out in SNA News and Notes (United Nations, 2012).

4.186 In summary, the key aspects of the accounting treatment are as follows:

• (a) The payments for emission permits, issued by governments under cap-and-trade schemes, should be recorded at the time the emissions occur as taxes on production on an accrual basis;

• (b) The timing difference between the payments received by government for the permits, and the occurrence of the emission, gives rise to a financial liability (accounts payable) for government and a financial asset (accounts receivable) for the permit holder. The difference between the prepaid tax value of the permit and the market value of the permit at any point in time represents a marketable contract (non-produced, non-financial asset) for the holder. The creation and disappearance of the non-produced, non-financial asset are recorded as other changes in the volume of assets;

• (c) The approach to accruing payments for emission permits should be based on the underlying assumption that permits issued by a particular country are more likely than not to be surrendered in that country;

• (d) In the simple case of a pure national scheme, the taxes should be accrued in the following way: the tax recorded for any single permit surrendered in relation to emissions that occurred in period t is equivalent to the total stock of relevant other accounts payable for the government in relation to emission permits, divided by the total number of active permits issued (and remaining in circulation) at time t; ⁴⁰, ⁴¹

• (e) For multinational schemes, the situation is more complex; as in any single country, more or fewer permits may be surrendered than the number that were originally allocated to the country.

4.187 The taxes paid for tradable emissions permits are treated as environmental taxes and categorized as energy taxes when the permits relate to emissions of carbon dioxide. Where possible, these taxes should be separately identified within energy taxes. When the tradable permits relate to other types of emissions, the taxes should be categorized as pollution taxes.

4.188 Table 4.10 presents the type of information that may be compiled regarding the quantity of emissions permits—expressed in terms of millions of tonnes of carbon dioxide. The table is structured along the lines of an asset account showing the opening and closing stock of permits and the various changes in the stock through new issues, purchases, sales and surrenders. Where possible, distinctions among flows of free permits, non-free permits and permits from multinational schemes should be recorded.

Table 4.10.

Account for tradable emissions permits

(millions of tonnes of carbon dioxide)

^a Non-profit institutions serving households.

Table 4.10.

Account for tradable emissions permits

(millions of tonnes of carbon dioxide)

	Institutional sector
	Corporations	General government	Households	NPISHa	Total
Opening stock of permits	1 133	225		5	1 363
Permits allocated free of charge	2 355	987			3 342
Permits purchased	1 851	616			2 467
Permits sold	925	1 169			2 094
Losses (cancelled permits)	9			2	11
Permits surrendered to offset emissions	3 612	144			3 756
Closing stock of permits	793	515		3	1 311

^a Non-profit institutions serving households.

View Table

Table 4.10.

Account for tradable emissions permits

(millions of tonnes of carbon dioxide)

	Institutional sector
	Corporations	General government	Households	NPISHa	Total
Opening stock of permits	1 133	225		5	1 363
Permits allocated free of charge	2 355	987			3 342
Permits purchased	1 851	616			2 467
Permits sold	925	1 169			2 094
Losses (cancelled permits)	9			2	11
Permits surrendered to offset emissions	3 612	144			3 756
Closing stock of permits	793	515		3	1 311

^a Non-profit institutions serving households.

4.189 Depending on the purpose of analysis and data availability, the columns in the table may reflect the holding of permits by industry (classified following the ISIC) or by institutional sector (as shown in table 4.10). While the focus of emission trading schemes is generally on governments and corporations, a significant proportion of permits may be purchased by non-profit institutions.

Environmental consequences of disposing of fixed assets

4.194 To provide a complete accounting for fixed assets, it is necessary to consider the costs incurred to prevent environmental problems when production or operation ceases and use of fixed assets ends, for example, when:

• Nuclear power plants are decommissioned and final storage of nuclear waste must be provided

• Oil rigs and other mining equipment are dismantled and removed

• Landfills are sealed, gas and leakage collection systems are closed, and monitoring equipment installed

• Mines are closed and mining slag heaps are treated to minimize leaching

4.195 Costs incurred in these types of situations are referred to as decommissioning costs. Decommissioning costs may be divided into: terminal costs and remedial costs. Terminal costs are costs that can and should be anticipated during the production periods prior to closure; provision should be made for meeting them during the life of the fixed asset. Remedial costs are incurred when production has already ceased, with no provision having been made for the taking of remedial action while production was in progress. Examples are the rehabilitation of sites contaminated by past activities, for example, fuel storage sites, and former landfill and abandoned mining sites.

4.196 The key distinction between terminal and remedial costs is based on the timing of the costs (see below) and on who incurs these costs, since the nature of the goods and services purchased may be very similar. Terminal costs are incurred by the enterprise that owns the associated fixed asset (oil rig, nuclear power plant, etc.) and form part of the link between the value of the fixed asset to the enterprise and the value of services rendered by the asset over its life. In principle, they should be anticipated by the owner of the asset, even if the expenditure takes place only at the end of the operating life of the asset.

4.197 On the other hand, remedial costs are incurred after operations at a site have ceased and, often, are incurred by a unit other than the operator of the site.⁴²

(a) Consumption of fixed capital

4.198 As decommissioning costs are associated with measuring the use of fixed assets in the SNA, the present discussion commences with a short introduction to the concept of consumption of fixed capital and its links to the value of fixed assets. Broadly, the economic assumption is that the cost of purchasing an asset, at any stage of its useful life, is equal to the net present value of the expected stream of income arising from the use of the asset over the remainder of its asset life.

4.199 The using up of an asset over time through its use in production is accounted for by means of an allowance for consumption of fixed capital (commonly known as depreciation). This allowance should be deducted from income and recognized as a cost of production.

(b) Treatment of terminal costs

4.200 In principle, once price changes and other changes in volume⁴³ are taken into account, the difference between the acquisition and disposal values of a fixed asset should be equal to the value of consumption of fixed capital accumulated over the life of the asset. In the case of assets with actual costs at the time of disposal, this means that consumption of fixed capital should cover anticipated terminal costs, since these costs lower the disposal value. Terminal costs should therefore be written off over the whole life of the asset, regardless of the number of owners during the life of the asset.

4.201 Immediately before the disposal, the asset will have a negative value which returns to zero when the terminal costs incurred are treated as gross fixed capital formation. The apparent oddity of an asset with negative value reflects the fact that the owner not only could not sell the asset but will have to pay another unit to take over responsibility for the asset. ⁴⁴

4.202 To estimate anticipated terminal costs, it is necessary to estimate not only the extent of these costs, but also their likelihood. In this regard, terminal costs present a dual problem: (a) it is often difficult to anticipate their final amount and (b) the original owner or operator may no longer be an active business able to cover the costs, if it has ceased business or declared bankruptcy or if an associated surety was based on underestimated terminal costs.

4.203 There is the added factor that, between the initial estimate of terminal costs and the time at which the terminal costs were actually incurred, community standards may have changed, meaning that the final terminal costs relate to standards different from those initially anticipated. This is especially true of operations conducted over lengthy time periods.

4.204 Nonetheless, there are a number of indications that terminal costs can reasonably be expected: (a) there is an upfront bond (or some other form of surety) that has been provided; (b) the enterprise is required to progressively put in place contributions to fund the final decommissioning activities; (c) indications based on the past record of the enterprise; and (d) there is a commitment to environmental restoration by the government of the country in which operations are taking place.

4.205 Terminal costs should be recorded as gross fixed capital formation only at the time incurred but the deduction of these costs from income through consumption of fixed capital should be made progressively over the life of the asset, that is, consumption of fixed capital should be charged against income before the disposal/terminal costs are incurred (or fully known). A practical difficulty in estimating terminal costs stems from the fact that the asset life of the underlying fixed asset may change over time, thus requiring changes in the estimates of terminal costs.

4.206 Since terminal costs must be estimated before being incurred, the following four accounting scenarios need to be considered:

• (a) In situations where the terminal costs ultimately incurred exceed the cumulated consumption of fixed capital allowance, the full costs are treated as gross fixed capital formation and any amount not already covered by consumption of fixed capital during the life of the asset is written off at the time the costs are incurred as additional consumption of fixed capital. This is a pragmatic recommendation and will lead to overstatement of net value added during the periods the asset is in use and understatement in the period when the remaining costs are incurred;⁴⁵

• (b) Where no estimates of terminal costs have been made during the life of the asset, any terminal costs should be treated as gross fixed capital formation and then immediately written off as consumption of fixed capital, provided that they are paid by the operator;

• (c) Where terminal costs are anticipated and a consumption of fixed capital allowance is recorded but the terminal costs are never actually incurred by the operator, the initial estimate of terminal costs must be removed from the balance sheet through the other changes in volume of assets account, thus leading to a rise in the value of the fixed asset on the balance sheet.⁴⁶ Any subsequent decommissioning costs incurred by units other than the operator are treated as remedial costs;

• (d) If terminal costs are overestimated compared with actual terminal costs ultimately incurred, this overestimate is corrected through an entry in the other changes in volume of assets account, leading to a rise in the value of the fixed asset on the balance sheet.

(c) Treatment of remedial costs

4.207 Costs of a remedial nature are often incurred after a site has been closed and the operator has left. There are two main types of remedial costs: (a) expenditures to restore land to allow its use for some other purpose; and (b) expenditures to ensure that no harmful emissions from deposits of pollutants and other residuals from past activity are able to leach into the surrounding environment and cause environmental damage. In both cases, the relevant expenditures should be treated as gross fixed capital formation and give rise to a fixed asset: land improvement.

4.208 For remedial costs, there is no special consideration required regarding the timing of reporting nor are there questions regarding whether the costs are anticipated, since, by definition, these costs are incurred after the operations at the site have ceased and are not incurred by the operator of the site who caused the need for the remediation.

4.209 In cases where environmental protection expenditures are incurred on an ongoing basis so that environmental damage is either inhibited or reduced on a continuing basis, then these expenditures should be treated as intermediate consumption or gross fixed capital formation of the owner at the time they are incurred and not recorded as either terminal or remedial costs.