Putting a price on nature: Rethinking Water Ecosystem Accounting
By Silvia Ferrini, Vittoria Reas, Alice Bartolini, Paul Ekins and Joe Grice
In 2020, the value of nature’s contribution to the UK economy was estimated at £51 billion, exceeding the output of several major industries. Nature also contributes in many other ways to the economy and society such as our health and well-being, which is not reflected in this estimate. Yet, despite its importance, natural capital is increasingly under threat and is largely outside national accounting boundaries. This also has a negative impact on sectors that depend on it such as agriculture and manufacturing (e.g., textiles, food, chemicals, and automotive industries).
Our new ESCoE discussion paper addresses some of the issues and opportunities for broadening the evidence base supplied by the National Accounts by providing systematic information about the value of nature’s contribution to the economy, focusing on the services provided by freshwater systems. The UN’s System of Environmental Economic Accounting – Ecosystem Accounting (SEEA EA) has now been adopted by over 90 countries, including the UK. This provides a systematic framework for accounting for ecosystem services and has been designed to allow comparison and integration with National Accounts, such as those compiled in the UK that are prepared in accordance with the UN’s System of National Accounts.
These accounts can bridge environmental economics with effective policy, management, and decision-making by offering standardised, GDP-comparable metrics, thereby supporting policymakers in understanding the economic role of natural resources.
The SEEA EA recommends valuing nature based on exchange values (i.e., the price that would be paid in the market) to be consistent with National Accounts. However, Water Ecosystem Services (WES) often lack observable market prices or are provided at a reduced cost. This makes it difficult to assign them an accurate economic value.
To address this, SEEA EA outlines preferred valuation methods (Figure 1).
Practitioners are typically left with three practical categories of valuation approaches:
This paper assesses the use of these methods for valuing Water Ecosystem Services (WES), using both top down and bottom-up approaches. The top-down analysis draws on the SEEA EA’s recommended hierarchy of methods (see Figure 1) and recent SEEA EA reviews, studies and publications on water ecosystems. The bottom-up analysis is based on a systematic review of real-world studies that have applied these methods.
Our aim is to evaluate how these methods are used in practice, how well they align with accounting principles and their feasibility for UK WES accounts. The findings offer practical guidance for applying the SEEA EA valuation framework and help identify the most suitable methods for implementation in the UK.
One key issue is inconsistent terminology, partly due to overlap between SEEA EA classifications and established environmental economic methods. For example, many studies use different names for the same ecosystem services. Water filtration and water purification, for instance, may describe the same service. The same issue applies with methodologies. These inconsistencies can lead to confusion, make it harder to standardise accounting practices and reduce the coherence and comparability of results. In addition, recent research suggests that some non-market valuation methods, traditionally designed to estimate welfare values, may be suitable for use in ecosystem accounting, with certain adjustment.
Another key finding relates to the SEEA EA valuation pyramid itself. Isolating the ecosystem’s specific contribution remains challenging, yet our findings reveal that 57% of studies use cost-based approaches (e.g., replacement or avoided damage costs), which are positioned at the base of the valuation pyramid. This raises a broader question: is it time to revise the SEEA EA’s pyramid of valuation methods to better reflect practical realities and improve guidance for implementation?
Accurately valuing water ecosystem services is essential for making informed policy and investment decisions. Without reliable methods, analysis and data that reflect the true economic contribution of nature, we risk undervaluing the ecosystems we depend on. Improving how we measure and better link these values with the National Accounts helps ensure that nature is properly recognised, protected and managed for future generations.
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.