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That credit bubble has come about because Government accounting systems have not adequately been able to incorporate the true value of nature. If we wish to understand the true value of nature, we must do better at understanding the true nature of value. The Treasury Green Book sets out guidance to the civil service on appraisal and evaluation in central Government-indeed, that is reflected in its subtitle. The Green Book constitutes binding guidance to Departments and Executive agencies,
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and its latest edition has many virtues. It has replaced the old discount rate of 6 per cent. with one of 3.5 per cent. in real terms. It has introduced adjustment procedures to address the systemic optimism that has afflicted the proper appraisal of policies in the past. However, on the key issue of valuing environmental, non-market impacts, it is hopelessly inadequate.

Here are some examples of the advice given on various ecosystem services. On biodiversity, the Green Book says:

Of water, it says:

On air quality, it remarks:

Finally, on greenhouse gas emissions, it records:

If those pieces of advice were translated to meet the criteria for the crystal mark for clear English, they would say, "This is all very difficult to measure. Where possible, please provide an indication of whether pollution will increase or decrease and by how much. Where you don't know, please make an educated guess."

I agree that the process of evaluating natural capital is tremendously difficult, but what is startling in the exhortations that I have read out is that, aside from recognising the difficulty of the exercise, they provide virtually no guidance to civil servants or Executive agencies about what they should proactively do to arrive at a valuation that could be fed into a cost-benefit analysis.

These issues are relevant not just to domestic policy and domestic decision making. My hon. Friend the Minister has supported the millennium development goals, so I am confident that she understands only too well the fact that the problem of valuing natural capital has a profound effect on the lives of the world's poorest people and goes to the heart of questions of international justice and poverty alleviation. If we are to meet the millennium development goal of taking half the world's poor out of poverty by 2015, we must enable them to preserve the value of their natural capital, which represents more than 50 per cent. of the gross domestic product of the world's poor. The Minister will acknowledge that developing countries that have taken proper account of their natural capital, such as Botswana, have been markedly more successful economically than countries that have not done so, such as the Democratic Republic of the Congo.

One way to refine our methods of evaluation is to work on specific examples where natural capital is under threat. One such example is tropical coral reefs. Six months ago, the Royal Society set out the following scientific analysis:

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parts per million. It continues:

That is a quotation from the Royal Society meeting of 6 July 2009.

Only last month, in Copenhagen, the world spectacularly failed to agree a pathway to reduce emission levels to 450 ppm by 2050. The current saturation level stands at 370 ppm. Coral is doubly vulnerable to climate change because it cannot survive where CO2 concentrations make the pH balance of the sea water too acidic and it dies if the water becomes too warm.

Tropical coral reefs are often referred to as the rain forests of the seas, because although they cover less than 2 per cent. of the planet's surface, they form the most biodiversity-rich ecosystem in the world, providing a home for more than one quarter of all the planet's fish species. They are therefore of tremendous economic importance, and more than 500 million people depend on them for their livelihoods. Estimates of the overall human welfare benefits from those ecosystems are significant. One estimate puts them at $172 billion annually. Those benefits arise not just from commercial and artisan fishing, but from shoreline protection, where the reefs help to prevent coastal erosion, as well as those from tourism and other recreational uses.

I ask my hon. Friend specifically to task her officials to use tropical coral reefs as an appropriate study to refine their methods of ecosystem valuation. We have a superb opportunity to do that in relation to the current Foreign Office consultation on the future of the British Indian Ocean Territory. The Chagos archipelago in the Indian ocean comprises 55 tiny islands set in 250,000 square miles of what are some of the world's cleanest seas. It is one of the largest and healthiest coral atolls on the planet. The Foreign Office is consulting on whether that pristine coral reef should be established as a full, no-take marine protection area for the whole of the territorial waters. It is officially an environmental preservation and protection zone, and a fisheries conservation and management zone, and evidence suggests that if that action were to be taken, the British Indian Ocean Territory might be one of the coral reefs to hold out the longest against climate change, and could act as a potential seed bank for the reintroduction of coral to areas where the indigenous tropical reefs had been
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degraded and bleached. That could enable coral reefs to be re-established, once anthropogenic greenhouse gas emissions were brought down to more manageable levels.

There is one additional unique benefit that such a study of coral reefs may bring in improving our understanding of the valuation of natural capital. It relates to the fact that the degradation of the ecosystem is approaching a threshold of irreversibility. The Economics of Ecosystems and Biodiversity climate issues update report of September pointed out:

There have been only five great extinction events in the history of all life on Earth. None have taken place within the span of the human species. Scientists believe that each began with the collapse of a global ecosystem. If coral reefs were to collapse, that could presage an extinction event such as humanity has never before witnessed. The loss of fish stocks would almost certainly result in a global food crisis, but of potentially far more serious consequence is the fact that it would almost certainly change the very nature of the oceans and their interaction with the rest of life on our planet. The French philosopher Blaise Pascal was famous for his wager in which a lifetime of religious observance was staked against an eternity of damnation. Modern accounting for natural capital must similarly be able to reflect in its assessment of risk and probability the fact that action to prevent the loss of global ecosystems might be costly in economic terms but that when the alternative is global catastrophe, the odds must be adjusted accordingly. Our planet is a delicately balanced system. The continuation of human life and culture-the language of Shakespeare and the music of Bach-depends on the actions of our generation in the next 10 years.

I ask my hon. Friend to accept that national economic accounts need to be complemented by natural capital accounts, and that there is a need for the existence and value of ecosystem services to be better reflected in national accounting processes and policy makers' decision making. Biodiversity and ecosystems are poorly recorded in the national economic accounts. Often they feature as an economic resource only in relation to their private benefit. Ecosystem services supporting production are considered as mere externalities. All the free amenities and regulating services supplied by well functioning ecosystems are simply not recorded. Depreciation of the natural capital is not reflected in the price of goods. I ask my hon. Friend to agree that natural capital accounts should be used to help policy makers to understand the natural resource stock available-land,
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water, soil, biodiversity and biomass-and better to calculate the changes to it and the delivery of ecosystem services that result from it.

As part of the efforts to integrate the environment into national accounts, some countries have been developing air accounts, water accounts, land accounts, soil accounts, emissions accounts, waste accounts, and so on. Forest accounts figure in almost all resource accounting exercises, including, I am happy to say, those of the UK. Some countries have also measured the carbon sequestration services provided by forests. However, whereas the measurement of carbon sequestration by forests seems to be well established and accurate, on the whole, the measurement of carbon sequestration by soil, water and other biota, and the stock of carbon, is much less well developed. That needs to be standardised. The linkages across the wider set of ecosystems services are also still very weak. More needs to be done to integrate different natural capital accounts to cover the full spectrum of ecosystem services.

I ask my hon. Friend to give her political commitment to take those tools to a more formal level, with full development and integration alongside national accounts. She will be aware that, at the international level, the London Group on Environmental Accounting is in the process of preparing a handbook on integrated environmental and economic accounting, the draft version of which was approved by the United Nations Statistical Commission in 2003. Eventually there needs to be a statistical standard covering all aspects of environmental accounting, and that is expected to be approved by the commission in 2012.

Without good natural capital accounts, the importance of natural resources to economies will continue to be under-appreciated, and sub-optimal use will continue to be made of those assets-economically, environmentally and socially. As assets underperform, natural capital is being run down, and future benefit streams decrease as the asset base is eroded and product prices fail to reflect their full costs. That results in an environmental debt to future generations and/or to the exporters of commodities that are extracted from degrading ecosystems, often in poor developing countries. For low-income groups, which rely more than others on the ecosystem services supplied by natural capital in the environment, the image given by the current system of gross domestic product, national income and household consumption aggregates is seriously misleading.

Valuable commodities are too often extracted from ecosystems at the expense of those free services and ancillary products, and no heed is paid to depreciation of natural capital and the resulting decline in future services. That means that, in terms of total welfare, the poorest in our world can get poorer, even though their monetary income might increase in real terms. That comes about because of the degradation of the natural capital that provides the biggest part of the goods they need for survival-food, fibre, water, and so on. By measuring those costs that are not covered by market prices, it must be possible to measure the "GDP of the poor" and how far it declines in proportion to the share of conventional GDP growth, based on ecosystem degradation.

This year, 2010, is the international year of biodiversity. In Nagoya this year, the parties to the United Nations convention on biological diversity will meet. It is often
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seen as a poor relation to the United Nations framework convention on climate change, the parties to which have just met in Copenhagen. It is my belief that the CBD is every bit as important as its more glamorous sibling.

A change in climate on its own would not matter were it not for the fact that species and ecosystems will not be able to keep pace with the rate of climate change. It is the inability of species to adapt and maintain biodiversity that will cause the ecosystem services upon which human life depends to break down.

My final request is that my hon. Friend tasks Treasury officials with preparing the UK's submissions to the Nagoya conference. The environment is too important to be left to the politically weak environment Ministries of the world. The valuation of natural capital and the economic importance of ecosystem services will be essential elements of public policy accounting in the 21st century. Indeed, it is my belief that if Treasuries do not quickly incorporate those issues into the heart of Government accounting practices, the 21st century might well be our last.

12.50 pm

The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): May I take this opportunity, Mr. Atkinson, to wish you a happy new year? It is a pleasure to serve under your chairmanship.

I congratulate my hon. Friend the Member for Brent, North (Barry Gardiner) on securing a debate on the important topic of Treasury accounting in relation to natural capital. When he applied for it, I doubt whether he envisaged us debating the subject on a day on which, if the forecasters are to be believed, Britain will probably be feeling the effects of extreme weather. Of course, the inconvenience of unaccustomed snow in this country is nothing compared to what may happen in developing and poor countries if we cannot stem the tide of climate change. Part of that process will involve a proper understanding of economics in relation to natural capital and an improvement in our evidence base in relation to policy making.

Many of the services provided by the natural environment are not traded, so they have no market value, but their value to society can be substantial. For example, the annual benefits provided by the world's coral reefs alone, through the provision of food, raw materials, recreational opportunities and protection against extreme events, have been estimated at $172 billion. Those services are threatened by a changed climate. The Government are fostering international and domestic efforts to promote an understanding of the economic benefits delivered by the environment and to improve the evidence used in policy making to ensure that we live within our environmental limits.

The Government's strategy to help deliver a better quality of life through sustainable development was first set out in 1999, and reviewed in 2005 in "Securing the Future". That strategy set out the principles that we must all follow in our duty of care towards the environment and the need for the Government to lead by example, to ensure the well-being of ourselves and of future generations.

The development of policies and the selection of options for their implementation by the Government are governed by the guidance provided in the Treasury's Green Book. It provides guidance on how the total
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costs and benefits to society of any proposed interventions should be assessed. It recommends social cost-benefit analysis as the main tool of assessment, which quantifies in monetary terms as many of those costs and benefits as feasible. It stresses that it includes any environmental impacts, which are often difficult and controversial to value in monetary terms.

Much valuation research is ongoing, however, to improve how such environmental impacts are accounted for. For example, updated guidance on the value of greenhouse gas emissions will be published shortly, with the intention of reviewing those values every two years as our knowledge of their impact and cost develops. Guidance already exists on adapting long-term policies to the expected impacts of climate change, and on how to value changes in biodiversity and in air quality.

Invaluable though it is for aiding the inclusion of natural capital impacts in the appraisal of policy, it is recognised that social cost-benefit analysis cannot, on its own, fully inform decision making if significant changes are involved. The Department for Environment, Food and Rural Affairs is therefore leading a group of economists and experts on sustainable development from across government, which will draw on leading academics in these fields, in a review of the economics of sustainable development. The group was set up in autumn 2008 to investigate whether current approaches were sufficient to ensure that sustainability was taken into account in the design of policy changes, or whether revised or additional supplementary Green Book guidance was required.

The group published an interim report in October 2009, in which it concluded

It went on to say that substantial work remains to be done to provide policy makers with a more complete toolkit, and noted that there are still many environmental assets for which we do not yet have agreed recommended values.

The group's report also noted that more consideration needs to be given to the appraisal of policies that have large or so-called non-marginal impacts. Relevant in that respect are policies that impact on certain critical assets-assets that, if allowed to decline below certain levels, could change the long-term growth path of the economy and its potential for wealth creation. For other assets-for example, clean air-there will again be limits to the acceptable degree of pollution. A key limitation of cost-benefit analysis in that regard is that it treats all forms of capital as if they were completely substitutable for one another.

There is therefore a need to limit the use of natural assets to supplement cost-benefit analysis assessments in many areas. Some limitations already exist-for example, the land use planning regulations in the UK. The use of minimum standards in certain contexts is being investigated for air quality issues-for instance, when uncertainty is particularly prevalent and it might pay to invoke the precautionary principle. An asset check study is also being considered; it would give greater clarity on the assets that should be sustained, the levels below which they should not be allowed to fall and the actions that would be necessary if those levels were breached.

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