Abstract
This paper presents a growth accounting framework in which subsoil mineral and energy resources are recognized as natural capital input into the production process in two ways. Firstly, the income attributable to subsoil resources, or resource rent, is estimated as a surplus value after all extraction costs and normal returns on produced capital have been accounted for. The value of a resource reserve is then estimated as the present value of the future resource rents generated from the efficient extraction of the reserve. Secondly, with extraction as the observed service flows of natural capital, multifactor productivity growth and sources of economic growth can be reassessed by updating income shares of all inputs and then by estimating the contribution to growth coming from changes in the value of natural capital input.
The empirical results on the Canadian oil and gas extraction show that, adding natural capital increases the annual multifactor productivity growth in the oil and gas sector from −2.2 to −1.5 % over the 1981–2009 period. During the same period, the annual real value-added growth in this industry was 2.3 %, of which about 0.3 percentage points or 15 % comes from natural capital.
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Notes
- 1.
It will be calculated within the asset boundary of the System of National Accounts (SNA). According to the SNA (2008, §12.17), the asset boundary of a subsoil resource is limited to its proven reserve. The proven reserve of a subsoil resource is defined as its stock that is technically feasible and economically valuable for exploitation. The reserve data by commodity for Canada can be found in Statistics Canada CANSIM tables 153-0012 to 153-0028. Although different terminologies are used for describing reserves in these tables, such as “established reserve” for oil & gas and sulphur, “recoverable reserve” for coal and uranium, and “proven and probable reserve” for all others, they all refer to as the “developed reserves” defined as those that can be expected to be recovered through existing installations (wells or mines) under existing operating methods and economic conditions (Statistics Canada 2006, Text Box 3.1). As seen, the “proven reserve” and “developed reserve” are in principle the same concept.
- 2.
Baldwin and Gu (2007) show that this average derived from the Productivity Accounts closely approximates the cost of capital derived from the long-term corporate bond rate and the equity rate of return earned on Canadian equities.
- 3.
The SEEA (2012) suggests using an economy-wide interest rate derived from returns on government bonds as the rate of return on produced capital and the discount rate as well. The alternative of using an exogenously chosen rate of return that is suggested by the SEEA (2012) is not used here because of the difficulties in arbitrarily choosing an exogenous rate of return and the inconsistencies that would result from not dealing with the surplus that would be generated in other industries.
- 4.
- 5.
SEEA (2012) discusses various approaches for estimating resource rent and recommends the use of the residual value method.
- 6.
SEEA 2012 recommends that real long term government bond rates can be used if appropriate industry specific rates of return are not available, as is the case for many countries.
- 7.
An alternative to (13.8) is to replacing c ijt with r Bt or its moving averages over a certain period.
- 8.
Generally speaking, the expected rate of return on investment should be the same for different projects or across industries after adjusting for project- or industry-specific risks. Empirically, some investments, especially those in intangibles, are often not measured in the current capital stock measure. Also, project- or industry-specific risks are often different. As a result, the measured rates of return on capital stock over a long period are not necessarily the same across industries. However, the empirical evidence in Baldwin and Gu (2007) shows that the long-term average internal rate of return on capital in the Canadian total business sector is highly comparable with the long-term weighted average rates of interest on debt and equity in Canadian financial markets, which implies that the current coverage of capital stock in Canada may not be an issue in terms of the overall rate of return on capital. For a specific industry such as mining, its rate of return on capital may differ if the unmeasured investment and industry-specific-risks largely disproportionate from those for the total business sector. But if this were the case, the exogenous rate of return on capital used for a specific industry would also need to be modified to account for this.
- 9.
An alternative to (13.10) is to replacing r jt with r Bt or its moving averages over a certain period.
- 10.
In this situation, the bottom-up approach of (13.13) is superior to the top-down approach of (13.12). For example, assume in an industry with multiple resource extractions, the sample average of the internal rate of return on capital is low in the extraction of one resource but high in the extraction of all other resources. The industry-level internal rate of return can be low enough such that the resource rent derived directly using the industry-level data becomes zero simply because of the low internal rate of return in the extraction of one resource. In this case, a top-down approach will lead to zero resource rents for all resource extractions, while a bottom-up approach will result in zero resource rent for the resource extraction with low internal rate of return and positive resource rents for others with high internal rates of returns.
- 11.
The user cost of using the reserve is the value of the surplus that is derived from its use. In the case of physical capital this involves both a depreciation of the asset and an opportunity cost of capital. These are both combined in the surplus actually derived from the natural capital asset.
- 12.
Let C be the total cost of a resource extraction including the cost of labour, produced capital and intermediate inputs, and P be the market price of the resource. The unit resource rent is equal to the market price net of the marginal cost of extraction (\( {P}^D=P-\partial C/\partial D \)) that is increasing in the degree of scarcity and the quality of deposit of the resource.
- 13.
Subsoil resources are traded both directly—in terms of transfers of land—and indirectly through the purchase of firms. While the value of the resources transferred is sometimes publically stated or calculated by the financial press, a large enough data base does not exist to allow use of these estimates here.
- 14.
The net present value (NPV) method is recommended in SEEA (2012) for the valuation of subsoil resource reserves.
- 15.
- 16.
Hotelling’s rule is derived under the assumption of the existence of a representative agent. The assumption may not hold because some companies pay royalties to the owner of the resources and some others do not. Given such heterogeneity among individual mining companies, the aggregate extraction path of a resource reserve may not be socially optimal even when each individual extraction path is optimal to each mining company. As a result, the Hotelling’s rule may not hold exactly. But Miller and Upton’s work suggests it holds approximately.
- 17.
Firms need to dig deeper and/or extract more waste to extract the same amount of mineral or energy content due to declining in natural resource quality. As a result, technical progress would be understated by the quality-unadjusted MFP growth. As the quality adjustment may involve some major data development, we will address this issue in a separate paper.
- 18.
The capital stock data by both industry and commodity does not include land and inventories due to lack of measures or sufficient quality.
- 19.
The business sector is defined differently in CPA and in CANSIM table 031-0002. In CPA, the business sector combines the business establishments of the North American Industry Classification System (NAICS) codes 11–81, while in CANSIM table 031-0002 it covers the all industries less public administration (NAICS 91), education (NAICS 61) and health (NAICS 62). To ensure the two sets of business sector data are consistent, this paper subtracts education (NAICS 61) and health (NAICS 62) from the CPA business sector data. After the adjustment, the coverage difference between the two definitions is minimal.
- 20.
See Appendix Table A.1 for Oil & Gas.
- 21.
The volume of natural gas liquids is approximately 1/600 of the gaseous volume at atmospheric conditions. We apply this conversion factor to make natural gas liquids and normal natural gas additive in volume.
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Acknowledgements
We would like to thank John Baldwin, Wulong Gu, Michael Wright of Statistics Canada, Pierre-Alain Pionnier of OECD, Michael Smedes of Australian Bureau of Statistics, Vernon Topp of Australian Productivity Commission, Erik Veldhuizen of Statistics Netherlands, and Carl Obst of the London Group for their valuable comments and suggestions. Also thank participants of 2013 CANSEE (Canadian Society for Ecological Economics) conference at York University, Toronto, and 2014 NAPW (North American Productivity Workshop) VIII Conference at Ottawa/Gatineau, for helpful discussions. All errors are our own.
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Adams, P., Wang, W. (2016). Accounting for Natural Capital in Productivity of the Mining and Oil and Gas Sector. In: Greene, W., Khalaf, L., Sickles, R., Veall, M., Voia, MC. (eds) Productivity and Efficiency Analysis. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-23228-7_13
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