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Developments in Environmental Protection Expenditure Accounts This product is designated as National Statistics

Released: 10 January 2012 Download PDF

Abstract

This article presents experimental estimates of environmental protection expenditure by the UK public sector in the years 1996 to 2009. The article firstly discusses the concept of environmental protection expenditure and its relevance. Next, the history of environmental protection expenditure accounts in the UK Environmental Accounts, for both the public and private sector, is discussed. This includes reference to the requirements to improve the accounts set out by the UK Statistics Authority in their assessment of the UK Environmental Accounts against the Code of Practice for Official Statistics. The remainder of the article outlines work to date to deliver on these requirements, including early estimates for public sector expenditure, together with an assessment of further developments needed to deliver economy-wide environmental protection expenditure accounts in line with emerging international standards.

Acknowledgements

The author would like to thank Donna Livesey, Jawed Khan and Matt Jones for their comments and suggestions, together with those organisations and individuals who have helped in establishing the user need for Environmental Protection Expenditure Accounts.

Introduction

Estimates of environmental protection expenditure have been included in the UK Environmental Accounts since 2002. However, whilst estimates of expenditure by industry have been updated annually, measures of public sector expenditure lapsed when the original data source was discontinued and so the latest year for which data was published is 2004. A study to address this (Gazley, 2007) identified alternative sources but the resource was not in place to follow up on the findings. A strategy for the UK Environmental Accounts (Livesey, 2010), which sought to address priorities for the development of the accounts, concluded that the user requirements for environmental protection expenditure must be more clearly established before further development work could be prioritised.

The UK Statistics Authority has since confirmed this requirement in their assessment of the UK Environmental Accounts against the Code of Practice for Official Statistics (UKSA, 2011) but went further in their recommendations. At the same time the prominence of environmental protection expenditure accounts has been rising internationally.

This article outlines work to date to deliver on the UKSA requirements, including  presenting the results of a review of user needs and early experimental estimates for public sector expenditure. An assessment is also made of further developments needed to deliver economy-wide environmental protection expenditure accounts in line with user needs, emerging international standards and best practice.

What is environmental protection expenditure?

Environmental protection activities

The UN System of Environmental -Economic Accounts (SEEA), which it is anticipated will be adopted shortly as the recommended method of accounting for all UN member countries, defines two types of environmental activity – environmental protection and resource management.

Environmental protection activities are those activities whose primary purpose is the prevention, reduction and elimination of pollution and other forms of degradation of the environment.’

Resource management activities are those activities whose primary purpose is preserving and maintaining the stock of natural resources and hence safeguarding against depletion.’

SEEA Chapter 4 (Draft, October 2011)

Environmental protection activities, as referenced in the SEEA, are classified as part of the Classification of Environmental Activities (CEA) as follows:

  • Protection of ambient air and climate

  • Wastewater management

  • Waste management

  • Protection and remediation of soil, groundwater and surface water

  • Noise and vibration abatement

  • Protection of biodiversity and landscapes

  • Protection against radiation

  • Research and development for environmental protection

  • Other environmental protection expenditure activities

Noting that an activity may serve multiple purposes, an environmental protection activity is determined based on the primary objective being consistent with this classification framework.

Environmental protection activities do not include activities aimed primarily at reducing the depletion of natural resources such as oil and gas reserves or the restoration of the stocks of resources such as forests or fish stocks. Such activities are classified to resource management and are not the primary focus of this article. Activities related to minimising the impact of natural hazards and treating damage resulting from an already polluted environment are also out of scope.

Environmental protection expenditure accounts

Transactions between institutions within the economy which concern the preservation and protection of the environment are generally assumed to be recorded within the UK National Accounts framework but as part of wider aggregates and so will not always be immediately identifiable.

As a satellite account to the UK National Accounts, an important role for the UK Environmental Accounts is to draw out these transactions from the economic aggregates, classifying them by their function.  This includes identifying transactions such as environmental taxes and subsidies and the output of the environmental goods and services sector and also resource management and environmental protection expenditures.

The user requirement for environmental protection expenditure accounts is explored later in this article but the accounts can be used to understand society’s response to environmental concerns and the degree of environmental protection activity taking place, changes in this activity over time and how this activity is being funded.

Full environmental protection expenditure accounts present the value of environmental protection goods and services produced in the economy and the expenditure of resident units such as the government and industry on these goods and services.

Four tables are presented in the SEEA as the proposed basis for a full set of environmental protection expenditure accounts:

  • Production of environmental protection specific products by resident producers where aggregates such as gross value added and net operating surplus ,being measured consistently with SNA accounting conventions, can be compared with macro-economic aggregates for the whole economy.

  • Supply and use table for environmental protection specific services with supply including those goods and services supplied by resident producers and through imports and use encompassing domestic consumption and exports.

  • Total national expenditure on environmental protection representing the total outlay by the economy on these activities including capital formation.

  • Financing of national expenditure on environmental protection. This seeks to shed light on how the environmental protection expenditure is funded. For example, an investment grant or subsidy from government may be funding industry and household investments in capital.

History of UK Environmental Protection Expenditure Accounts

Estimates of environmental protection expenditure have been included in the UK Environmental Accounts since 2002. This has comprised of estimates of environmental protection expenditure by industry and estimates of expenditure by the public sector.

Environmental protection expenditure in specified industries

The Department for Environment Food and Rural Affairs (Defra) collect and publish annual statistics on spending incurred by companies where the primary aim is to reduce environmental pollution caused by normal operations. This includes operational and capital expenditure, including research and development expenditure, and is based on Defra’s Environmental Protection Expenditure by Industry survey.

 This survey is intended to meet the requirement of the EU Structural Business Statistics Regulation 58/97 and together with environmental protection expenditure by public sector, forms the basis for completing a Joint OECD/Eurostat questionnaire on Environmental Protection Expenditure.

ONS presents a summary of the industry statistics as part of the UK Environmental Accounts. 

Environmental protection expenditure by the public sector

Estimates of public sector environmental protection expenditure were last published as part of the UK Environmental Accounts for the reference year 2004. These estimates utilised administrative data generated as part of the Public Expenditure Statistics Analysis (PESA) produced annually by HM Treasury. When this source was discontinued, the statistics were effectively suspended , though the estimates continued to be presented in the UK Environmental Accounts. A review (Gazley, 2007) was carried out but due to a lack of available resources, the outcomes were never implemented and the estimates were not updated.

UK Statistics Authority assessment of the UK Environmental Accounts

The UK Statistics Authority has a statutory function to publish a Code of Practice for Statistics, by which all official statistics must comply in order to qualify as National Statistics. The UK Environmental Accounts produced by the Office for National Statistics underwent assessment in 2011, with the findings published on 30 June. The Statistics Authority confirmed that the UK Environmental Accounts should be designated as National Statistics subject to ONS implementing a series of 7 requirements and reporting progress by December 2011. Requirement 5 refers specifically to estimates of environmental protection expenditure.

Requirement 5 is described in 3 parts:

a) Consult users to establish the nature of user needs for statistics on environmental protection expenditure.

b) Ensure that statistics on environmental protection expenditure by the public sector are produced to a level of quality that meets user needs.

c) Review the way in which these and other statistics on Environmental protection expenditure are presented in Environmental Accounts to ensure clarity, interpretability and consistency.

UKSA, June 2011

The Statistics Authority found that the presentation of the outdated public sector estimates alongside the more timely industry estimates to be confusing for users, particularly since they were presented inconsistently.

The remainder of this article outlines the progress in addressing recommendation 5 as of December 2011 but it should be noted that early work has identified that a fairly significant development programme will be required to deliver on all user requirements for environmental protection expenditure accounts and so the article concludes with required next steps.

User needs for statistics on environmental protection expenditure

The strategy for the UK Environmental Accounts, and subsequently the assessment by the Statistics Authority identified a clear requirement to establish the nature of user needs for environmental protection expenditure accounts in order to inform and prioritise developments. 

Following on from very limited response to a previous open consultation, it was decided to target specific known and potential users of the accounts directly, and to supplement this with information gathered from published materials.  The method of consultation was direct communication via email. 10 positive responses were received from UK policy users and devolved bodies, international users, and others including academics and analysts.  The findings are categorised by type of user in order to draw out how user needs might differ. 

UK policy users

The Department for Environment, Food and Rural Affairs (Defra) is responsible for advising on Environmental policy and legislation.  Defra advised that they use environmental protection expenditure statistics to assess current spending levels, though they suspect the policy drive to monitor environmental expenditure generally is not as great as it once was.  The interest is more in specific indicators for UK expenditure, for example, information on biodiversity to meet international framework requirements. They would ideally like to see the Environmental Accounts provide such information for the public sector, as they currently have to use ad hoc methods to collect the information and this would help fill gaps for local government but they also advised that they have built up expertise in this area which we could potentially seek to draw upon in the future.

Devolved governing bodies are tasked with administrative responsibilities for accounts of environmental protection expenditure and make use of public sector environmental protection expenditure estimates in support of this. The statistics are also potentially useful to the Environmental Agency in England and Wales, the Scottish Environmental Protection Agency (SEPA), and the Environment and Heritage Service in Northern Ireland as they are responsible for the regulation of pollution risks to air, water and land. SEPA advised that they use information on environmental protection expenditure to inform analyses on environmental sustainability and monitor changes in environmental priorities, for example, a recent project explored ecosystem services using environmental protection expenditure analyses.

The UK Environmental Accounts are delivered as part of the ONS programme to develop measures of National Wellbeing programme and will support measures of environmental sustainability, where making explicit the transactions relating to good management of the environment is considered part of the vital building blocks (CMEPSP, 2009).

The Welsh Government advised that estimates of environmental protection expenditure may have future applications, for example as part of Experimental Environmental Satellite accounts. 

International users

In response to the consultation, Eurostat advised that, used jointly with physical data, information on environmental protection is demanded by policy makers to help to follow up and monitor the efficiency of environmental policy, the applications of the ‘polluter pays’ principle and the costs of compliance with environmental regulations, and to provide a basis for cost/benefit analyses for new environmental policy proposals.

The EU Regulation on Environmental-Economic Accounting adopted in 2011, whilst not requiring immediate reporting by member states on environmental protection expenditure, identified this account as one of the key modules for development in the next phase. The work being carried out by Eurostat to confirm user requirements for environmental protection expenditure will inform the development of this module.

Countries in Europe that already have full environmental protection expenditure accounts have stressed the benefits but it is recognised that to implement a full account, as outlined earlier in this article, is a potentially high cost operation. Eurostat have also been examining the overlap between environmental protection expenditure accounts and environmental goods and services sector accounts, for which there is also a pilot data collection. SEEA notes the overlaps between these accounts and so taking this into account, together with the costs, it is likely that a simplified streamlined module will be proposed in the short term.  

OECD uses of environmental protection expenditure accounts include informing performance reviews of the actions that policy makers are taking to reduce the pressure on the environment. They also serve as an indicator of the response from society for reducing environmental pressure in general, and as a sustainable development indicator.

The OECD Green Growth strategy is aimed at delivering economic growth whilst placing focus on environmental sustainability and natural assets. Environmental protection expenditure accounts are identified as one tool for monitoring whether existing programmes are consistent with rules regarding state aid and the polluter pays principle, and whether they have a secondary effect of encouraging or discouraging consumption of polluting products.

Additionally, OECD identified environmental protection expenditure as a good starting point for measuring the maintenance costs for environmental assets, especially when broken down by environmental protection activity. OECD stressed the importance of ensuring any developments to the UK environmental protection expenditure accounts are based on the SEEA framework.

The European Environmental Agency makes use of public environmental protection expenditure in their analyses of the need for environmental financing and to follow up and monitor specific support and investment programmes.

Other National Statistics Institutes contacted confirmed the value of having internationally comparable data available.

Other users

The Institute for Fiscal Studies (IFS) use environmental protection expenditure to compare trends in real public expenditure and environmental taxation receipts to assess fiscal policy regarding the environment and also in carrying out more in depth analyses on expenditure trends. Additionally, they expressed an interest in more detailed and disaggregated environmental protection expenditure data which would allow them to integrate environmental protection into analyses of distributional effects of cuts to public expenditure. 

Examples of other countries’ EPE data uses

To provide some indication of the practical applications of any statistics, it is helpful to examine their uses in countries where they are well established. Statistics Germany advised that in common with the UK, their data is freely accessible making it difficult to cite all uses. However, they pointed to policy makers and the German Environment Agency using the accounts to assess environmental protection methods and to monitor that the appropriate agent is carrying the financial burden for the measures. Additionally the accounts are used by environmental research institutions for estimates of ‘Green Jobs.’ On an international level the data is used by Eurostat and the OECD to construct comparison indicators such as ratios of environmental protection expenditure to gross domestic product. Another indicator used in performing comparisons is environmental gross fixed capital formation (GFCF) to total GFCF. This can be a useful comparison as it provides the share of capital spent for environmental protection purposes from all capital expenditure, and capital expenditure may be more focused on sustainability and future benefits than operational expenditure. Statistics Netherlands told us that their data is used by policy makers at the Ministry for the Environment, and by the National Environmental Institute for cost benefit analysis. The Netherlands have been working on the development of a full environmental protection expenditure account and were able to confirm that it is a resource intensive undertaking.

Conclusions on user needs

Consultation with users has provided a positive insight into the potential applications of environmental expenditure accounts. It would also indicate that there are two levels of interest. In the first instance, there is clear need for simple accounts with time series which indicate total levels of environmental protection expenditure, the domains of expenditure e.g. air pollution or biodiversity, and who is funding the expenditure. There is also a clear interest distinguishing current and capital expenditure and considering the statistics within the context of wider economic aggregates. This confirms the importance of the environmental accounts operating as a satellite to the national accounts and that any accounts should be in line with the SEEA principles.

Further to this, there is evidence that there is value to developing full accounts in line with international standards but this will require some investment and the benefits are somewhat intertwined with those delivered by an environmental goods and services sector account. ONS is working in parallel to develop an account of the environmental goods and services sector (Livesey, 2010) and so next steps for the two accounts might sensibly be considered together.    

Experimental estimates of environmental protection expenditure by the public sector

The needs of users will be revisited later in the article to inform future plans but users have confirmed an interest in basic statistics on environmental protection expenditure by domain.

We already have annual estimates of environmental protection expenditure by industry but as identified by the Statistics Authority, the review of public sector expenditure (Gazley, 2007) needs to be revisited and estimates brought up to date. Initial results achieved within the timeframe of reporting to the UK Statistics Authority are presented here but this should be viewed as a first step and that the data comes with caveats and plans for further developments, include some already identified in the previous review which it has not yet been possible to address.

Methodology

The Combined On-line Information System (COINS) is used by HM Treasury to collect outturns from across the public sector to support multiple functions including the compilation of public expenditure statistics and supplying data to the ONS for the national accounts.  Data are provided by central government departments and, within the Treasury pre-defined aggregates, departments can choose the level of granularity at which they record spending data.

HM Treasury therefore caution users that departmental data are recorded on COINS at different levels and the same department may choose to record data at different levels of granularity in different years and/or for different entities within the departmental group.

The transactions are classified using the UN COFOG (Classifications of the Functions of Government) system and the figures presented here represent an aggregation of those operational and capital expenditure transfers which are classified to the environmental protection domains for general government, as provided to ONS as a snapshot at a point in time. The COFOG codes are not available to the level of detail of the CEA and are classified as follows:

5 – Environmental protection 

 05.1 – Waste management
 05.2 - Waste water management
 05.3 – Pollution abatement (ambient air and climate)
 05.4 – Protection of biodiversity and landscape
 05.5 – Research and development environmental protection
 05.6 – Environmental protection not elsewhere classified

Initial results

Initial results, as illustrated by figure 1, indicate that expenditure on environmental protection by the public sector, with the exception of 2005 and a small fall in 2008 has been growing fairly steadily, increasing almost fourfold in the 13 years between 1996 and 2009. Expenditure on environmental protection activities increased by £1.5 billion (13 per cent) to £13.2 billion between 2008 and 2009 with the largest increase in waste management (£0.9 billion).   Our best information based on published sources is that the sharp increase in 2005 can most likely be accredited to the decommissioning of British Nuclear Fuels that year. It is difficult to know how much of this amount represents environmental protection activity bearing in mind that departments attribute transactions to only one code, even if it represents multiple functions, essentially a ‘best fit’ approach.  Despite the considerable size of the project, this shouldn’t distort the trend as the decommissioning was essentially a one-time occurrence.

Figure 1: Public sector environmental protection expenditure 1996 - 2009

Environmental protection by general government
Source: Office for National Statistics, Treasury (Her Majestys)

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Examining the environmental protection expenditure for the latest year, figure 2 clearly illustrates the dominance of expenditure for waste management, accounting for 77 per cent of total spending.

This is to be expected as waste management covers all collection, treatment and disposal of waste managed by local authorities. However, returning to Figure 1, we can see that the proportion of total expenditure that waste management represents is down from 95 per cent in 1996, indicating that expenditure in other areas of environmental protection, as a whole, has grown at a faster rate.

The domain classed as ‘Other abatement activities’ grew quickly between 1998 and 2002 and has remained at a fairly constant level since that time. It is likely that this represents the changes brought in by the new government elected in 1997 as the domain is focused around administrative and legislative expenditure.

Public sector environmental protection expenditure by domain 2009

breakdown for latest year by environmental domain
Source: Office for National Statistics, Treasury (Her Majestys)

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Quality assessment

These statistics are helpful in identifying the broad trends in environmental protection by the public sector over time and providing an indication of the domains of expenditure. Estimates are available on a regular basis on a consistent basis with the national accounts from a respected and robust source. The cost of compiling estimates is minimal compared with other methods previously considered, such as using published annual reports, a method which would bring its own quality issues. However, some broad caveats need to be considered when interpreting the results. 

Firstly, we return to the note of caution offered by HM Treasury regarding the responsibility for assigning the granularity of the transactions on the COINS database. A department may record a single transaction for a project or may break it down in to several transactions if this suits their administrative purposes. The treatment of a transactions from one year to the next may also change if a department has a machinery of government change or changes its own accounting practices.

A second and related consideration is the assignment of transactions to environmental domains. The issues are broadly the same. Both issues can be illustrated using a practical example.

Defra’s resource accounts 2009-2010 include £264 million for a biodiversity project. If this project is described as having a primary motive to administer agricultural affairs and conserve arable land, applying the COFOG classifications it might be assigned to ‘Economic Affairs’. However, an alternative decision might be taken to assign it to ‘Protection of Biodiversity and Landscape.’ A third option could be that Defra breakdown the project into more than one transaction, assigning them to a mix of codes.

As part of this project we have tried to establish if we can gain more details on each of the transactions based on the descriptions recorded on COINS but this has not proved possible in the short term.

It is suspected that this would be a particular issue for transport, energy and agriculture projects where some element of environmental protection is likely be a desired outcome, or even a specified criterion for securing funding. However, using a single code, it is probable that the economic driver would dominate and so this nuance would be lost. This suggests that total environmental protection expenditure by the public sector is potentially understated at 0.01 per cent of GDP in 2009.

Another potential issue is disaggregating general government between central and local government.  The data for central government is drawn from the COINS database and that of Local Government is compiled from data provided by the Department for Communities and Local Government and the devolved governments. However, for local government the breakdown by type of expenditure is not consistent with that for central government making comparisons and further disaggregation problematic.

Finally, the UN COFOG classifications applied remain inconsistent with the CEA classifications recommended for classifying environmental protection expenditure in the SEEA. This will be discussed further now when examining the common presentation of industry specific and public sector environmental protection expenditure.

Presentation of environmental protection expenditure statistics in the UK Environmental Accounts

The final recommendation by the Statistics Authority was that the estimates of environmental protection expenditure by industry and the public sector be presented in a way which allows for better comparability and interpretability, providing a more coherent story. The next opportunity to address this will be as part of the UK Environmental Accounts publication in June 2012.

Updating the public sector estimates annually will help with this, as will presenting the reference tables on a consistent basis for both datasets. Figure 3 illustrates how a time series might be presented encompassing all environmental protection expenditure. However, there are two caveats which must be considered. These figures have not been summed as they are not currently based on an integrated environmental protection expenditure account and the potential for double counting must be explored. Also, it is important that these estimates are not then interpreted as a whole economy measure as not all sectors of the economy are covered. The industry data, for example, focuses on those industries with the highest levels of expenditure.

Environmental protection expenditure by the public sector and selected industries

Expenditure by selected industries and general government
Source: Office for National Statistics, Environment, Food and Rural Affairs, Treasury (Her Majestys)

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Additionally, caution is advised for both the industry statistics (which are based on a survey with limited response rates) and the public sector data when making absolute year on year comparisons. Again, broad trends are as much as can currently be interpreted. What might be more helpful would be to look at the snapshot of expenditure by domain for the latest year. The outstanding issue here is the inconsistency between the COFOG and CEA classifications, the former being employed for the public sector estimates and the latter for the industry data. Survey collection rather than the use of administrative data means that there is greater flexibility in updating classifications for the industry collection over time.

Further work towards UK Environmental Protection Expenditure Accounts

Based on the user requirements identified in this report, the likely emerging international reporting requirements and the potential quality issues identified with current source data, the following next steps are proposed.

  • In the Environmental Accounts 2012 publication to present expenditure by the public sector and industry building on the work of this article to present a more coherent story and provide the necessary supporting information to assist users in interpreting the data. An enhance methodological document should also be available by this time in support of the statistics.

  • The work by Eurostat, working with National Statistics Institutes, to develop a reporting module for environmental protection expenditure should provide the roadmap for developing streamlined environmental protection and environmental goods and services sector accounts which will address some of the issues identified here. ONS should follow the developments closely to inform next steps.

  • Publication of comprehensive and fully integrated environmental protection expenditure accounts which implement the SEEA in full should for now be viewed as an area for long term development, given the resource issues identified and competing priorities for UK Environmental Accounts.

Background notes

  1. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

    These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

References

  1. Gazley I (2007), Review of Public Sector Environmental Protection Estimates.

  2. HM Treasury, What is COINS data?.

  3. Livesey D, (2010), Measuring the Environmental Goods and Services Sector (107.2 Kb Pdf) .

  4. Livesey D (2010) Consultation on the strategy for UK Environmental Accounts.

  5. Stiglitz et al. (2009) Report by the Commission on the Measurement of Economic Performance and Social Progress

  6. UK Statistics Authority (June 2011), Assessment of compliance with the Code of Practice for Official Statistics – Environmental Accounts.

  7. United Nations Statistical Division (2011) Systems of Environmental Economic Accounts, Draft Central Framework.

  8. United Nations Statistical Division, Classification of Functions of Government.

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