Chapter 16: Environmental Services

The measurement of Environmental services faces a number of challenges distinct from those described in previous chapters. These were not addressed in detail by Atkinson (2005), in part because the concept of ‘Environmental services’ has evolved since that date.

Before the Review could commence the normal work of understanding inputs, outputs and outcomes, the review needed to identify the classification which should fall into scope of this category.

Whilst the Classification of Functions of Government (COFOG) group 5 relates to Environmental Protection, this is not currently independently published for the UK. The Office for National Statistics (ONS) includes this area within the ‘Other’ grouping, which includes COFOGs 1, 3.05, 3.06, 4, 5, 6, and 7. All services in this grouping are measured on an ‘inputs = outputs’ basis. As well as COFOG 5, the Review’s analysis suggests that similar activities can be located in numerous COFOG categories. For example, Forestry is currently treated under ‘Economic Affairs’, because it produces timber, an economic asset, rather than within ‘Environmental Protection’, because of the environmental impact it has.

A challenge to identifying the correct scope is the changing perspective of the government services which fall into ‘Environmental Protection’ or ‘Environmental services’. A clear and useable definition is important given the UK policy priority on climate change, clean power and net zero, and addressing nature loss and promoting nature recovery. For example, the ONS has recently created a clear and useable definition of scope and indicative estimates for ‘green jobs’.

However, even for functions which are likely to be brought into scope, a second major issue is where departments and local government have not been required to separate these out within their relevant data returns. This means it may not be possible to build realistic historic time series of inputs, even if output data can be identified.

Finally, this is an area that has seen material change since the last update to the COFOG, both in the productivity but also the type of services being delivered. As such, the challenge discussed in numerous chapters, where traditional measures capture technical efficiency (improving an existing process) well but capture allocative efficiencies (swapping to a better process) less well, is likely to be present here. There would be a clear need to consider this in any future work.

16.1 Core methodological and data challenges identified

Potential Improvements to the COFOG categorisation

The current COFOG classification system is more than 20 years old and presently COFOG 5 ‘Environmental Protection’ describes spend across six categories:

• 5.1: Waste management.
• 5.2: Wastewater management.
• 5.3: Pollution abatement.
• 5.4: Protection of biodiversity and landscape.
• 5.5: Research and development on environmental protection.
• 5.6: Environmental Protection Not Elsewhere Classified.

Whether these still describe the range of relevant services, is a pertinent question. As highlighted in Chapter 6, the United Nations has commenced a review of the COFOG structure to ensure that it remains fit for purpose in measuring government expenditure. Although outcomes are not expected until around 2027, it is the Review’s understanding that there is broad international consensus that ‘Environmental Services’ should be added as a service area within the COFOG structure. The UK has made recommendations to better reflect environmental services.

A more inclusive measure of ‘Environmental Services’ spending would include a range of activities captured outside of those currently contained in COFOG 5. It is important to consider how best to take account of cross-cutting issues of increasing policy interest such as climate change, climate and health, biodiversity, and the ‘circular economy’ (whereby waste is recycled and brought back into productive use), alongside disaster risk management and spending that may have multiple impacts.

This chapter presents the Review’s research on alternative categorisation for an ‘Environmental Services’ COFOG, which the Review labels ‘Section E’ to distinguish it from the existing number-based system. Section E would align more closely to alternative frameworks, such as the proposed international Classification of Environmental Functions described by the European Commission (Eurostat). This provides a broader definition, encompassing all activities, goods and services that have an environmental purpose, i.e. that have as their primary purpose to prevent, reduce and eliminate pollution and other forms of degradation of the environment (e.g. treatment of waste and wastewater, protection of biodiversity), or to make more efficient use of natural resources, and hence safeguarding these from depletion (e.g. recovery and substitution of natural resources, recharges of natural stocks).

To cover all potentially related and inter-related functions that relate to this wider measure of environmental activity, the Review proposes an amalgamation of sections drawn from multiple COFOG categories to recognise and describe three proposed broad categories.

• E.1: Environmental Protection.
• E.2: Natural Resource Management.
• E.3: Climate Change and Net Zero.

COFOG 5 represents around one seventh of the ‘Other’ grouping, comprising 2.3 percentage points of the 16.1% of the public services captured by this grouping. Activities identified within categories E.1, E.2 and E.3 from outside COFOG 5 are predominantly also captured by the ‘Other’ grouping, so this proposal would make the statistics more user-friendly in the aggregate, as well as providing a better picture of Environmental services.

Researching the environment services classification

The Review acknowledges challenges around the conceptual definition of what should fall into scope of ‘Environmental services’ and how to aggregate these into a single output measure, hence enabling productivity measurement. For example, short-term local-scale activities work includes things such as a community tree-planting projects. Long-term complex landscape-scale outputs work includes things such as trends in national habitat biodiversity. These two areas operate on extremely different timescales and geographies and are delivered via completely different delivery organisations.

Certain environmental policy is also devolved, resulting in differences between UK nations. There is also an increasing role for combined authorities in the environment space (e.g. nature recovery and green space). The Review has learnt that the most challenging services to measure are either those with multiple bodies contributing towards outputs, or those where there are multiple outputs or outcomes being delivered. The measurement of Environmental services appears to face both these challenges.

Privatised and nationalised businesses

There may also be challenges relating to privatised and nationalised industries in this sector. If, for example, a waste-water management company was nationalised resulting in a classification change moving the firm between the private and the public sectors, this could result in significant changes in public service productivity. In such an eventuality, the ONS would need to follow established classifications practice, with considerations including whether market prices would continue to be charged to customers, or whether a nationalised firm received subsidies or similar funding to undertake ‘Environmental Protection’ activities.

16.2 Inputs

Whilst considering the potential scope of COFOG 5, the Review has investigated both UK central and local government spending, within the current COFOG 5, to understand potential input measures.

Central government spend is spread across all but one of the COFOGs within ‘Environmental Protection’, there is zero spend currently aligned to 5.2 ‘wastewater management’. Local Government data currently only exists for inputs into COFOG 5.1 ‘waste management’. This represents a potentially significant gap for further research into sourcing further detail on spending and alignment of activities.

The Department for Environment, Food and Rural Affairs (DEFRA) is the largest contributor towards currently captured COFOG 5 spending. Additional contributions come from the Department for Energy Security and Net Zero (DESNZ), the Department for Science, Innovation and Technology (DSIT), the Ministry of Housing, Communities and Local Government (MHCLG), the Department for Transport (DfT), the Department for Culture, Media and Sport (DCMS) and the Department for Business and Trade (DBT).

Potential additional inputs that the Review consider relevant but are not currently included within this COFOG might include, but are not limited to:

• Activity associated with land and habitat management of agricultural land, forestry or urban spaces, including local authority planning functions.
• Activity related to climate change action, including adaptation activities, flood protection and management of water resources.
• Potentially impact management or mitigation activities that affect our natural environment, such as work on greening transport networks.
• Activities related to green spaces in urban communities.
• Expenditure on international activities related to environmental protection.

As an example, the Review compared the activities captured within COFOG 5.4 to the estimated spend captured by Joint Nature Conservation Committee (JNCC) indicator E2 ‘Expenditure on UK biodiversity’, itself part of a broader set of UK biodiversity measures, which addresses one sub-domain of Environmental Protection.

The Review identified that whilst the trends over time follow similar patterns for the two measures, there is a significant difference in the record levels of spending. In financial year ending 2022, JNCC calculated a total public sector spend of £778 million on UK biodiversity (indicator E2). This compares with £317 million calculated from COFOG 5.4, or £655 million from combining COFOG 5.4 and 5.5 (Research & Development (R&D) Environment Protection).  Figure 1 of JNCC’s annual report provides the time series from financial year ending 2001 to financial year ending 2023. There are various differences between the JNCC and COFOG methodology, so care should be taken when comparing the two numbers.

Despite the inclusion of all COFOG 5.5 R&D spend (of which only a fraction can necessarily be expected to fall into this area, as opposed to the other services listed in COFOG 5), the E2 calculation highlights potentially significant gaps in current COFOG methodology. This indicates more work is needed to identify areas of missed spend and improve data coverage, address bias and uncertainty and improve methodologies. The Review is therefore confident that the current COFOG 5 structure does not account for the full range of activity related to ‘Environmental Services’.

In summary, data sources for E2 have a wider coverage of producers and are therefore likely to account for more relevant spending. Alongside more robust quality assurance and validation processes, this likely provides a more comprehensive calculation of total spend. However, expert judgement may propose further refinements and should be considered.

The Review undertook a similar exercise for COFOG 5.2 ‘wastewater management’ which could not identify any bodies recording spend against this area. While privatised water companies will be excluded as they are not part of the public sector, the Review’s expectation was that some proportion of the Water Services Regulation Authority (Ofwat) and Local Flood Authorities’ spending could be expected to be against this item. The Reviews anticipates these inputs have been recorded at a higher level of aggregation via the process of consolidation of accounts.

To identify spend in scope, the Review interrogated data recorded on the Online System for Central Accounting and Reporting (OSCAR), the Government’s financial system. Spend was filtered by: ‘carbon’, ‘environment’, ‘climate change’, ‘green’, or ‘sustainable’, alongside additional terms such as ‘green investment’, ‘carbon capture’, sustainable transport’, and ‘emissions’, rather than ‘labour’, ‘capital’, and ‘intermediate consumption’ to enable identification of activity areas. Some 4,234 lines of possible Environmental Protection spend were identified, aligned to five level 1 COFOG categories, covering a total of 19 sub-categories. For financial year ending 2022 these accounted for around 11% of total government spend (97% of which is Central Government expenditure).

These c. 4,000 lines of spend were mapped to the three proposed sectors (E.1: Environmental Protection, E.2: Natural Resource Management, and E.3: Climate Change and Net Zero). Challenges exist around apportioning spend where activities clearly contribute to multiple sectors, as OSCAR sources do not often provide sufficient detail to robustly and confidently assign them. Given most items are relatively small, the Review would not expect simply mapping them to the lead sector in the first instance would cause significant biases in the resulting statistics.

As an example, table 8 maps the existing COFOG categories which are proposed for inclusion into E.1 (Environmental Protection), which covers mainly COFOG 5 including waste, pollution, protection of biodiversity and landscapes and R&D, with a significant proportion of agricultural and forestry-related activities captured by COFOG 4. Tables for sections E.2 and E.3 are included in Annex H.

Table 8: Classification of Functions of Government expenditure by E.1 activities, UK, 2021

Section E.1 would account for 8.7% of all Central Government spend in financial year ending 2022. Data breakdowns for local government do not allow the Review to make a direct comparison. However, current spend on COFOG 5.1 (Waste Management) only accounted for 5% of Total Local Government Spending, covering mainly ‘waste management’. The other five categories consistently provide a nil return. The Review is confident that activities are carried out at the local government level that would provide services and activities directed towards environmental protection. Initial review of data from MHCLG suggests this activity may be aligned in alternative categories such as Housing, Communities or Transport, which would warrant further investigation.

The Department for Business, Energy & Industrial Strategy (since replaced by Department for Energy Security and Net Zero, Department for Science, Innovation and Technology and Department for Business and Trade) accounted for 96.3% of all E.1 spend in financial year ending 2022, with 96.4% of this coming from one of its seven arms length bodies, the Nuclear Decommissioning Authority.

Defra accounted for 2.1% of E.1 spend. The Northern Irish Executive (1.1%), Scottish Government (0.3%), and Welsh Government (0.3%) were the next largest, with DCMS and DfT responsible for small proportions of the total. Local Government Planning functions were not included in the above analysis but could also be included in E.1.

Deflators

Deflators remove the effect of inflation from inputs and so give clear sight of a consistent measure of volume through time. However, as many of the environmental assets and resources under consideration lie outside the national accounts, whether traditional deflators will suffice would be an issue for consideration. The deflator based on the Consumer Price Index can be used on majority of spending defined as intermediate consumption (P2), but further work would be required to identify appropriate deflators for different types of spend.

16.3 Output measurement

The Review undertook initial work on outputs, identifying high-level, UK-wide datasets that could be considered as suitable output measures. So far these cover waste management, water waste management and pollution abatement, but more work would be needed on the remaining three categories and activities outside of COFOG 5.

There are conceptual challenges in measuring output relating to the environment as distinct to outcomes which may be better captured in quality adjustments. Equally, the definition of outcomes which fall into scope is more challenging here as one cannot simply focus on human outcomes: environmental policy measures a broader set of objects and systems involving an array of natural and social sciences. Devolution of certain responsibilities also makes measurement more complex, for example the UK government maintains responsibility for delivering emission reductions nationally within the UN Framework Convention on Climate Change (e.g. Paris Agreement) while, for example, biodiversity conservation is fully devolved.

Table 9 captures a range of potential output and outcome measures which relate to the current COFOG 5 classification, and for which domestic data exists.

Table 9: Potential Environmental outputs or outcomes

However, the environment as an issue extends beyond domestic boundaries, and the Review recognises the importance of considering global targets and indicators. For example, the UK is a signatory to the UN Convention on Biological Diversity, through which it will report on a new Global Biodiversity Framework which is currently being finalised. The framework has 4 goals and 23 Targets, with each target having a set of headline, component and complementary indicators.