Issue 13 Recording of natural resource depletion Report

Issue 13 : Recording of natural resource depletion Report on depletion-related outcomes in the current SEEA update

SEEA Chapter 10 : Making environmental adjustments to the flow accounts Presents five sets of treatment options on depletion: i. Identifying the income element of resource rent (for both renewable and non-renewable natural resource (LG March 07, UNCEEA July 07)). ii. Recording mineral exploration and mineral deposits. (LG March 07, UNCEEA July 07) iii. Recording the additions to and subtractions from the stock of environmental assets. iv. Recording ownership of mineral-related assets. v. Recording depletion-asset recorded in the legal owner's balance sheet.

Adjustment i. Income element of resource rent Resolved at London Group meeting in Johannesburg, March 2007 ƒ Option A 3 - 'Part of resource rent represents a decline in the value of the asset and part is income' ƒ LG agreed this applied to non-renewable resources ƒ However, its application to renewable resources needed clarification

Adjustment i. Income element of resource rent §Issues Paper presented at London Group Meeting, Rome, December 2007 ƒ 'Depletion of Renewable Environmental Resources' §The paper clarified application of Option A 3 to renewable resources

Two issues required resolution When accounting for depletion of renewable resources used in production in SEEA accounts, 1. Is natural growth of renewable natural resources used in production a form of production? 2. Should depletion of such resources through use in production be treated as a form of capital consumption (as a charge against income)?

Proposed response to issues 1 Natural growth (net of natural mortality) of renewables used in production be treated as a form of non-market output in the SEEA Production account 2 Depletion of renewables used in production be treated as a form of capital consumption (consumption of natural capital) in the SEEA Production account

LG response to the issues The London Group unanimously accepted these proposals at its meeting in Rome, December 2007

Adjustment iii. Recording changes to the stock of natural resources Following the London Group endorsement of the recommended treatment of accounting for depletion of renewable resources used in production, consideration was given to recording changes to the stock of natural resources. Issues Paper presented at London Group Meeting, Rome, December 2007

Proposed response to issues §SEEA presents 3 options for recording changes to the stock of environmental assets (SEEA, Chapter 10, Box 10. 4). §None of the options in box 10. 4 were considered appropriate for recording changes to both renewable and nonrenewable environmental assets. §A fourth option, applicable to both renewable and non-renewable environmental assets, was proposed.

Proposed Option C 4 §For non-renewable natural resources the consequences of extraction are recorded in the extended generation of income account leading to a depletion-adjusted operating surplus, but corresponding increases in these resources are shown in the other changes in volume of assets account. §For renewable natural resources, both the consequences of extraction and net natural growth are recorded in the extended generation of income account leading to a depletionadjusted operating surplus.

LG response to the issue The London Group unanimously accepted Option C 4 at its meeting in Rome, December 2007.

Adjustment iv. Recording ownership of mineralrelated assets • Typical conditions of mineral extraction: legal owner establishes agreement with extractive enterprise so that the latter extracts the resource, earns resource rent, and pays rentals to the legal owner. • Agreement typically covers an extended period of time.

Options to record ownership • On the balance sheet of legal owner (SEEA option D 2) • On the balance sheet of extractor Partition the ownership: • On the basis of relative share of expected resource rent receipts (SEEA option D 1) • Financial lease approach

London Group meeting December 2007: • Agreed that the financial lease approach best describes the ownership arrangements under typical resource extraction conditions - and best explains related rentals and depletion flows • Depletion charge should impact on the production account and balance sheet of the same entity

Financial lease approach • Is a complex solution • Is not the approach suggested by 1993 SNA Rev. 1 (legal owner) • But SEEA requires a depletion charge against its production account, while SNA doesn’t allow this • SNA solution works for SNA but not ideal for SEEA

Current status of this work • London Group meetings were unanimous in their support for preferred outcomes

Current status of this work • But concerns recently raised by a London Group member during development of SEEA-E publication – Treatment of new discoveries of nonrenewable natural resources – Holding gain/form of income rather than ‘other volume change’ or as the output of a process of economic production • Affects LG support for (i), (iii) and (iv) • Affects UNCEEA support for (i)

Current status of this work • Also, LG decisions depart from SNA – Income element treatment for renewables extends the production boundary • In SNA, purely natural growth is part of production but only if that growth is under the direct ownership and control of a producing unit. eg fish growth in a fish farm, or timber growth in a plantation forest is SNA production. Timber growth in a native forest is not SNA production. – Ownership treatment is contrary to SNA

Current status of this work • Discussions will continue to allow response to these concerns

SEEA Chapter 10 : Making environmental adjustments to the flow accounts i. Identifying the income element of resource rent (for both renewable and non-renewable natural resource (LG March 07, Decision point UNCEEA July 07, Progress report UNCEEA July 08) ii. Recording mineral exploration and mineral deposits. (LG March 07, UNCEEA July 07) iii. Recording the additions to and subtractions from the stock of environmental assets. (LG Dec 07, Progress report UNCEEA July 08) iv. Recording ownership of mineral-related assets. (LG Dec 07, Progress report UNCEEA July 08) v. Recording depletion-asset recorded in the legal owner's balance sheet.