Public Disclosure Authorized Eni ronmental Accoulnting Public Disclosure Authorized for Sustainable Development Public Disclosure Authorized edited by E' YusufJ. Ahnad Salahi El Serafy Ernst Lutz Public Disclosure Authorized Bank Symposium A UJiNEP-World 4~~~~~~~~~~ i Accounting En4ronmental for Development Sustanable WorldBank Symposium A UN.EP- I I I Environmental Accounting for Sustasinable Development editedby Yusuf J. Ahmad Salah El Serafy Ernst Lutz The WorldBank Washington,D.C. °1989 The International Bankfor Reconstruction and DevelopmentI THE WORLD BANK 1818H Street,N.W., Washington, D.C.20433,U.S.A. Allrightsreserved Manufactured in the UnitedStatesof America FirstprintingJune 1989 The findings, interpretations,and conclusions expressed in this studyare entirelythose ofthe authorsand should not be attributedin anymannerto the WorldBank,to its affiliatedorganizations,or to members of its Boardof Executive Directorsor the countriestheyrepresent. of Congress Library Cataloging-in-Publication Data Environmental accounting for sustainable development: selected papersfromjoint uNEPfWorld Bankworkshops I editedbyYusuf J. Ahmad,SalahEl Serafy, Emst Lutz. p. cm.-(A WorldBanksymposium) Includes bibliographiesand index. 1. Naturalresources-Accounting.2. Environmental impact analysis. 3. Nationalincome-Accounting. 4. Economic development-Environmental aspects. L. Ahmad,YusufJ. II. El Serafy, Salah. Im. Lutz,Ernst IV. United Nations Environment Programme. V. International Bankfor Reconstruction and Development. VI. Series. HF5686.N3E58 1989 333.7'14-dc2O 89-33458 ISBN0-8213-1224-3 CIP Foreword Internationalorganizationsare making a substantialef- way must be found to measure the prosperity and pro- fort to incorporateenvironmental concernsiintheir regu- gress of mankind. laroperations.A great deal of work is nowbeing done to help clarifythe linkages between developmentand the We have witnessedincreasingpressure on the environ- environment. Thisworkwillenable us to irntegrate envi- ment and the natural resource base. We have come to ronmentaland resourcemanagementconcernsmore ef- understand that, where te environmentis concerned, fectively in the economicdecisionmaking process.It will "there is no such thing as a free lunch"and that someone be an essentialcomponentin our effortsto establishthe will eventuallyhaveto bear the "externalcosts" of pro- basisfor long-term and sustainable developrnent. duction and consumptionactivities.We must learn to dis5tinguish betweentrue incomegenerationand the draw- Environmental accountingis a complexand sometimes ing downof capitalassets by resourcedepletion or deg- elusivesubject.It is also a tool with great potential,how- radation. ever,a tool that can help ensure that future calculations This volumereflects the attention given during the past of nationalincomemore accuratelyrepresenttrue, "sus- six years by the World Bank and the United Nations tainable"income.The current systemof nationalincome Environment Programme, as wellas others, to this impor- accounting has some limitations. Gross domesticproduct tant topic. We hope it will help bring about a needed (GDP) figures are widelyusedby economists, politicians, changein attitudeand perceptionabout this issue. and the media. Unfortunately, they are generallyused without the caveat that they represent an income that BarberB. Conable MostafaTolba cannotbe sustained.Current calculations ig5norethe deg- ExecutiveDirector radationof the natural resourcebase and viewthe sales President UnitedNations of nonrenewable resources entirelyas income.A better The WorldBank EnvironmentProgramme v I~~~~~~~~~~~~~~~~~~ Contents Preface xi Abbreviations xii Contributors xiii 1. Environmental and Resource Accounting: An Overview 1 SalahEl Serafy and ErnstLutz Shortcomings of the CurrentNationalIncomeMeasures 1 The Necessityof Measuring SustainableIncome 2 DefensiveExpenditures 2 The Depletionand Degradation of NaturalResources 3 ResourceAccounting 4 LinkingEnvironmental and ResourceAccounts to the SNA 5 ConstructingEnvironmental and Resource Accounts Countries 6 for Developing A Varietyof Approaches, but a Common Theme 6 Note 7 References 7 2. Toward a Measure of Sustainable Social Net National Product 8 HermanE. Daly SustainableIncome 8 DefensiveExpenditures 9 Depletionof NaturalCapital 9 Reference 9 3. The Proper Calculation of Income from Depletable Natural Resources 10 Salah El Serafy Conceptual Background 11 Weakness Approach 12 of the Depreciation Conversion to a PermanentIncomeStream 13 of the UserCosi,Approach 14 Clarification Conclusion 17 Appendix.SplittingReceiptsinto Incomeand Capital 17 Notes 17 References 18 vii viii Contents 4. Introducing Natural Capital into the SNA 19 Anne Harrison Exploitable Resources 20 PermanentResources 20 Valuation of the Consumption of NaturalCapital 22 Environmental Enhancement Programs 22 UnplannedOccurrences 23 Sustainability and the SNA 23 Summary of Recommendations24 Note 25 References 25 5. Measuring Pollution within the Framework of the National Accounts 26 Derek W Blades The Outputof Pollutants 26 PollutionDamage 26 Costsof PollutionAbatement 28 Benefitsof PollutionAbatement 29 Conclusions 31 References 31 6. Correcting National Income for Environmental Losses: Toward a Practical Solution 32 RoefieHueting The Needto Use GDPwithProper Caveats 32 CorrectingNationalIncomefor Defensive EnvironmentalOutlays 33 Complementing Corrections for Defensive OutlaysthroughSurveys 34 Complementing Corrections for Defensive OutlaysthroughStandardsfor Sustainable Economic Development35 Notes 38 References 38 7. Environmental Accounting in DevelopmentPolicy: The French Experience 40 JacquesTheys The FrenchStratifiedSystemof Information 40 AdaptingEnvironmental Accountsto Developing Countries 45 Proposals 49 Conclusion: Toward a Programof Action 50 Appendix.Nomenclatures of the FrenchNaturalPatrimonyAccounts 52 Notes 53 References 53 8. Linkages between Environmental and National Income Accounts 54 RichardB. Norgaard SNA Developed by Consensus, Not Theory 55 The ValueAggregation Issue 55 The Bounded-KnowledgeSynthesis Issue 56 Conclusions 57 Notes 57 References 58 Contents ix 9. Environmental and Nonmarket Accounting in DevelopingCountries 59 Henry M. Peskin Usesof ExpandedAccountsin Developing Countries 59 ImplementationProblems 60 SuggestedCourseof Action E3 Notes 64 References 64 10. A Proposed Environmental Accounts Framework 65 Henry M. Peskin Theoryof Environmental AssetServices 65 ValuationConcepts 67 Investmentand Depreciation 67 Sourcesof Environmental AssetDepreciation 69 Overviewof the NationalAccountingStructure 69 Responseof Conventional Accountsto Nonmarketand Environmental Activity 71 A ModifiedAccounting Structure 72 The Environment and the ModifiedAccounts:Optionsfor Modifying GNP 76 Notes 77 References 78 11. Environmental Accounting and the System of National Accounts 79 Peter Bartelmus Environment Statisticsand PhysicalAccounting 80 Environment and NaturalResources in the SNA 81 Monetary Environmental Accounting 82 Indicatorsof Sustainable Productand Expenditure 84 FutureWork 85 Notes 86 References 86 12. Recent Developments and Future Work 88 Ernst Lutz and Salah El Serafy March1988) SNA Expert GroupMeeting(Vienna, 88 Joint UNEP-WorldBank Expert Meetingon EnvironmentalAccountingand the SNA (Paris,November1988) 89 SNA Expert GroupMeeting(Luxemburg, January1989) 89 Future Work 90 Annex.The Treatmentof NonreproducibleAssets,Stocks,and Flows underPresentSNA and "M.60"Standardsfor Reconciliation Accounts 90 References 91 Appendix. Participants at the uNEP-WorldBank Workshops 93 Index 97 I I I Preface This volume contains selected papers from a series of Numerousparticipantsat the workshopsmade signifi- workshops jointlysponsoredby the WorldBank and the cant contributions,either by presenting papers or by United Nations EnvironmentProgramme(UNEP). UNEP substantialparticipationin the discussions.They are too was created at the StockholmConferencein 1972. Dur- manyto acknowledge individually; insteadwe havehad to ing the past seventeenyears, membersof its Governing content ourselveswith listing the names and affiliations Councilhave urged UNEP to help clarifythe linkages of all participantsin the appendix to the text. Of the betweendevelopment and the environment. The council more than thirty papersor notes that were presented,we believedthat such clarification wouldhelpintegrateissues haveselectedthe seventhat appearedto us to have pro- of environmental and resourcemanagement ooncerninto vided broad insightsor brought out new aspects of a the framework of economic decisionmaking pro- and thius complexand sometimeselusivesubject.In addition,we vide a basis for long-termand sustainabledevelopment. haveincludedthree contributions that werewrittenafter- In 1982, UNEP'S Session of a Special Character,which wardby workshopparticipants(Chapters4, 9, and 10). commemorated the tenth anniversary of the Stockholm In general, the papers indicate current thinkingon the Conference, requestedthe executivedirector to develop issueof environmental and resource accounting.Readers methodological guidelines for developing countrieson en- interestedin examiningpapers not includedin this vol- vironmental accounting and its use in development policy ume are encouragedto contactthe particularauthors. and planning. The chapters in this volumereflect different aspects In February1983, UNEP conveneda consultative meet- and approachesto environmental accounting.They are ing under the chairmanship of YusufJ. Ahmad,assistant concernedmostlywith financialand economicconsidera- to the executivedirector and director for specialassign- tions and the prospects of modifying the U.N.Systemof ments at UNEP. The mainobjective of the meetingwasto NationalAccounts(SNA) to reflect issues of environmen- ascertainwhetherenvironmental accountingcouldbe de- tal and natural resourceconcern. velopedas a publicpolicytool,based on the presentstate In publishing this volumewe havereceivedencourage- of the art. Robert Goodlandwas the only 'WorldBank ment, support, or comments from Ramesh Chander, representative at that first meeting.He subsequently pro- Vinod Dubey,Stanley Fischer, Robert Goodland,Ken- vided much leadership and encouragedeconomiststo neth Piddington,Ibrahim Shihata, MichaelWard, and focuson these critical issues. He and YusufJ. Ahmad, JeremyWarford. Salah El Serafy,and Jacques Theys chaired the subse- quent workshops, whichwere sponsoredjointlyby UNEP YusufJ. Ahmad and the WorldBank. Salah El Serafy Ernst Lutz xi Abbreuiations CES Conference of EuropeanStatisticians isic Internationalstandard industrialclassification coFOG Classification of the functions of government IUCN InternationalUnion for Conservation of Nature (expenditures) and NaturalResources COIP Classification of outlaysof industriesby purpose MCLA Monetary Center forLatin America (also CEMLA) CPC Centralproductclassification MEB Materials-energybalance ECA EconomicCommission for Africa NDP Net domesticproduct ECE Economic Commission for Europe NNP Net nationalproduct ECLA Economic Commission for Latin America NRA Naturalresourcesaccounting (alsoCEPAL) OECD Organisationfor Economic Co-operationand EPP Environment ProtectionProgram Development ESCAP Economic and Social Commission for Asiaand OPEC Organization of PetroleumExportingCountries the Pacific PACE Pollutionand abatementcontrolexpenditures FAO U.N.Food and Agriculture Organization SGDE Sustainablegross domesticexpenditure FDES Framework forthe Development of Environment SGDP Sustainablegrossdomesticproduct Statistics SNA U.N.Systemof NationalAccounts GDFCF Grossdomestic fixed capitalformation SNDP Sustainablenet domesticproduct GDP Grossdomesticproduct SNNE Sustainablenet nationalexpenditure GNP Grossnationalproduct SSDS System of Socialand Demographic Statistics LARIW International Associationfor Research on In- UNEP U.N.Environment Programme comeand Wealth UNESCO U.N. Education Scientific and Cultural ICOR Incremental capital-output ratio Organization INSEE InstitutNationalde la Statistiqueet des Etudes UNSO U.N.StatisticalOffice Economiques WHO WorldHealthOrganization xii Contributors YusufJ. Ahmad RoefieHueting Senior Adviserto the executivedirector, U.N. Environ- Head, Environmental StatisticsDepartment,Central Bu- ment Programme, Nairobi,Kenya reau of Statistics,Voorburg, Netherlands Peter Bartelmus Ernst Lutz Chief,Environment StatisticsSection,U.N.StatisticalOf- Senior Economist, Environment Department, World fice, NewYork,U.S.A. Bank,Washington, D.C.,U.S.A. DerekW. Blades RichardB. Norgaard PrincipalAdministrator,Economicsand Statistics De- AssociateProfessor,Energyand ResourcesGroup, Uni- partment, Organisation for EconomicCo-operationand versityof California-Berkeley, U.S.A. Development, Paris, France Henry M. Peskin HermanE. Daly consultant,SilverSpring,Md., U.S.A.(formerlywith Re- Senior Economist, Environment Department, World sourcesfor the Future) Bank,Washington, D.C., U.S.A. JacquesTheys Salah El Serafy Head of Mission,Ministryof the Environment,Paris, Economic Adviser,EconomicAdvisory Staff in the Office France of the Senior Vice President-Operations,Norld Bank, Jan W. vanTongeren D.C.,U.S.A. W.Mashington, Chief,NationalAccountsSection,U.N.StatisticalOffice, Anne Harrison NewYork,U.S.A. Consultant,Stockbridge,UnitedKingdom (formerly with the WorldBank) xliii I I I andResource Environmentdl Accounting: An Overtiew Salah El Serafy and Ernst Lutz Most production and consumptionactivAities have some ance, and many other things. Developmentplanners, effect on the physical environment.As economicand economists, and politicians thus makefrequentuse of the populationgrowthhave occurred,they have increasingly nationalincomemeasureof gross nationalproduct (GNP) put pressureon the environment and the natturalresource and its variants, such as GDP (gross domesticproduct) base. Yearsago, whenthe pressure wasstill small, econ- and NNP (net nationalproduct) for a varietyof purposes. omistsmayhavebeenjustifiedin makingno referenceto GDP, the most commonly used variant of aggregate in- the role playedby the environment, both as a resource come, is essentiallya short-term measure of total eco- base and as a "sink" to receivethe residuesof the pro- nomic activityfor whichexchange occurs in monetary ductionand consumption process.But there is little jus- terms withina givenyear.It is valuable mostlyfor indicat- tificationforthis now. ing short- to medium-term changes in the level of eco- Economists haveconsideredthe side-eifects of produc- nomic activity,and it is particularlyuseful for demand tion and consumption activitiesto be "externaleffects." management and stabilizationpolicies.As calculatedat But such effects are external only if a narrow view is present, however, it is less useful for gauging long-term taken, whichdoes not considerthe effecton the resource sustainable growthpartly becausenatural resourcedeple- system as a whole.Although this systemis generally large, tion and degradationare being ignored. Furthermore, it is neverthelessfinite,and in certainrespectsit is subject GDP is often used inappropriately as an indicatorof "wel- to great stress. The realizationis growing that, wherethe fare," frequently withoutany caveat about its shortcom- environmentis concerned,"there is no such thing as a ings for that purpose. The concept of welfareis much free lunch"and that someonewilleventually haveto bear broader than a monetarymeasure of income. It covers those "externalcosts."If a broaderviewis talken, environ- manydimensions of subjective well-being other than those mental costs would be internalizedin the production that involve markettransactionsor that can be measured processes.In this connectionit is essential to reckon in monetary terms, particularlyfor people whose basic costs and benefitsproperlyand to distinguish clearlybe- materialneeds havebeen met. tween true income generationand the drawingdown of As most economists know,there are severalcontrover- capitalassets by resourcedepletionor degradation.This, sial issuesconcerningnationalincomeaccountingas cur- in generalterms,is the subjectof this volume. rentlybeing practiced,such as the treatment of leisure, householdand subsistenceproduction,other nonmarket Shortcomings of the Current National transactions, and the servicesof long-lived consumerdur- IncomeMeasures ables. This chapter willnot deal with any of those issues; instead it addresses certain environmentaland natural Incomeaccounting,if properly done, is a most useful resourceissuesas they relate to the proper measurement tool foreconomic analysisand policyprescriptions. It can of incomeand variationsin assets. GDP, as measuredat indicatethe levelof economicactivity, its variationsfrom present, does not adequatelyrepresent true, sustainable yearto year,the size of savingsand investment, the limits incomebecauseof two shortcomings. These concernthe society can consume out of its current receipts, factor treatment of environmental protectioncosts and the deg- productivity,industrial structure, comparative perform- radationand depletionof natural resources.The fact that 1 2 SalahEl Serafy and Ernst Lutz these issues are not properly dealt with in the current stream of incomegenerated by economicactivity. It has U.N.Systemof NationalAccounts(SNA)is a seriousflaw thereforebeen proposedthat such outlaysshould not be from an accountingpoint of view.As a result, policy countedas finalexpenditure,as is currentlythe case,but advicebased on measurements producedunder the SNA rather as intermediateexpenditure. can be faultyto the extent that GDP does not adequately A conceptually differentapproachcan be taken by con- reflectenvironmental and natural resourceerosion. sideringresourcessuch as water,air, soil, and so forth as natural capital.When such capital is drawndownor de- The Necessity of Measuring Sustainable graded,this shouldshowup as consumption in the meas- Income urements of national income whether or not defensive expendituresare actuallybeing incurred to correct for True income is "sustainable"income. This is a key the negativeeffectsand restore the drawn-down natural ~~ ~ ~ ~ ~ ~~~ True~ ~cptl Them difrec betweenle defesiv expendi- theme pointstressedbyDaly(Chapter2) and El Serafy(Chapter captal. The dlifference between the defensiveexpendi- 3). True income can be thought of as the maximum tures actuallyincurred and the depreciabonof the envi- amountthat can be consumedin a given period without ronmentalcapital wouldbe reflected at the level of net redcin reducingthe amount ofth amuntof ossbleconumpionin possibleconsumption in a fuure future domestic posed product and by Harrison (NDP). This approach outlined has in in more detail been pro- Chapter period.This conceptencompasses not only current earn- 4. A s arrconcal approach ha been propoed ings but also changes in assets: capital gains increase 4. A similar conceptual approach has been proposed by ingsm; b it.al..soes in assets. capi.Tal gssincrease Peskin (Chapter10), whoproposesthe introductionof a ionce;pit rede incoed T lncosehs . he esenc ot nature account in additionto the standard accounts for hasbee concpt sttedby Sr Jhn ick as f icom households,industry,and government.Aside from the the maximum valuethat a person can consumeduringa dfulty ing a consen to hoite environ- time period and stfi expect to be as well off at the end difficulty of reaching a consensus as to how the environ- of the period as at the beginning(Hicks 1946, a p. 172). e mental or natural capital is to be treated conceptually, ofudnth Prudent economicmanatghembeginng periodoma that p.o172). (uics 1946, management requires govern- the greatest difficulty lies in actuallyestimatingthe level ments knowthe maximum amountthat can be consumed of environmental servicesand damages. by a nation without causing its eventual impoverishment. Measuring Pollution within the sNA Framework It is important,therefore,that nationalincomebe meas- ured correctlyto indicate sustainable income. Adjust- Pollution-that is, the dischargeof wastesin waysthat mentsof the SNAappear to be necessaryin the two areas raise the cost of later activities,harm people, or reduce noted above, since these are currently not dealt with the enjoymentthey get from their surroundings-is an the so-called"defensiveexpenditures"to satisfactorily: tant area in fromtheir accountsngs-isan protector restorethe environment and the depletionand imp re inwichntental aconts clde resourcesused degradatio of natura to Improveenvironmental policymaking.Blades degradationof natural resources. (Chapter 5) distinguishes four aspects of pollutionand considersthe extent to whichit is possibleand usefulto Defensive Expenditures measurethem withinthe frameworkof the national ac- counts. These aspects are the output of pollutants, the Actionis often taken to defendthe environment against damagesof pollution, the costs of abatement,and the encroachment by economic activity,and the SNAtreats its benefitsderivedfrom it. costas generatingincome.Defensive expenditures can be Although it maybe feasible to use nationalaccountsto large or small, dependingon wherethe boundariesare measure the output of pollutants,the informationso ob- drawn.Thisvolumeconsidersonlydefensive expenditures tained maybe too generalto be usefulfor environmental againstthe unwantedside-effects of productionand con- policymaking. Chapter 5 notes that although there are sumption(such as pollution)but not those relating to conceptual and practicaldifficulties in estimating the total national security,even though similar argumentswould costs of pollutiondamage,it wouldbe possibleand help- applyto them.The most obviouscategoryto be included ful to identifysome of the main costs that are already under defensive expenditures is the cost of environmental includedin the nationalaccountsbut are not shownsep- protectionactivities.Anotherpossiblecategorywould be aratelyat present. The costsof pollutionabatementare a car repair and medicalexpenses as a result of traffic part of defensive expenditures. They havebeen measured accidents.Leipert listed other costs that might be in- in severalcountriesand have been incorporatedin mac- cludedand recentlymeasuredthe defensive expenditures roeconomic modelsto showthe effectof abatementpoli- for the Federal Republicof Germany(Leipert 1986 and cies on prices, output, and employment. In this area the 1987). national accountswould be a valuabletool for environ- It does not make sense to incorporate expenditures mentalpolicymaking, and Chapter 5 considers in detail incurred to redress some or all of the negative conse- the conceptual and practical problems of measuring quences of production or consumptionactivitiesin the abatementcosts. Finally, althoughit wouldbe interesting andResource Environmental An Overview 3 Accounting: to measure the "market valuation"of the benefits of fectedin developing countriesin whichnatural resources pollutionabatement,the practicaldifficulties involvedare are exploitedby the public sector. enormous,and it wouldgenerally not be feasibleto incor- Underlying this asymmetryis the implicit,as well as porate such data in the national accountson a regular inappropriate,assumptionthat natural resources are so basis. abundantthat theyare costlessor haveno marginalvalue. Historicallythey havebeen regarded as free gifts of na- Measuringthe Differencebetween Environmental ture-a bias that providesfalsesignals for policymakers. Standardsand Actual Behavior This approachignoresthe depletionof valuableresources and confuses the sale of commercially marketablenatural Hueting(Chapter6) discussesseveralw& s toD deal with assets with the generationof income.Thus it promotes defensive expendituresand lists the pros and ons of the and seemsto validate the idea that rapid economic growth defensive lists the ps ad ccan andexpenditures be obtainedby exploitinga resource base that may variousoptions.Sincehe is skepticalabout the usefulness be rapidlydiminishing. The growthcan be illusory,and of the willingness-to-pay-method,he prefersth't environ- the prosperity it engenderstransitory, if the apparentgain mental standards be determined by considerations of i i health and sustainable development. The costi of achiev- in income means permanent loss in wealth, that is, if at healtuchstandasutialedev beent. ost ofe Ite least part of the receipts is not redirectedinto new pro- ingld would standards suho show would how far nthenetimted. b has s These rosts ductive investments.As income is inflated, often con- a country drifted away from smto sas,adtecutycnendgt opa sustainable economic development. Although the ap- sumption is also, and the country concerned gets compla- susainab enomic de the .t Althoug h wouldap- cent about its economicperformance;as a result the poach ,ha inui tivenappa, dterm ingthecost wol adjustmentin economicpolicygets delayedby the seem- oinkages betweenproduction and consumptionactivities ing prosperity.In this regard, proper income accounting linkges betweent is an aid to better decisionmaking,but, of course, it does and the environment. Generally speaking,the issueof the treatmentof defen- not guarantee that improveddecisionswill actuallybe siveexpenditures for nationalaccounting assumes greater made. significancethe higher the degree of industrialization of Existingnatural capital of geological(nonrenewable) the countryconcerned.The issuesof depletionand deg- and biological (renewable) resourcesas wellas of flow radation, which are considered below, ar-enot directly resources(suchas water and air) is needed for industrial raain whc ar cosdee below, ar.o drcl and agroindustrialproduction.Newgeologicaldiscover- relatedto the levelof industrialization, however, although aswa astreyl anduconservation, dosnovers they seem to be particularlyrelevant to countries that tes, as wellas recyclkgand conservaton, do not reverse base their economicactivitieson the exploitation of nat- the depletion of known stocks. The newlydiscovered ural resources. stocks themselves comefrom a finite stock of resources, and they merelyextend the time span over whichdeple- tion can continue. Depletion of renewable natural re- The Depletion and Degradation sourcescan haveserious indirect effectsby reducingthe of Natural Resources sustainable flow needed for industrial inputs and eco- systemservices. There is an evident asymmetry in howthe SNA treats crop productionat the expenseof soil erosion Similarly, man-madeassets and natural resources. Man-madeas- cannot be sustained.Only carefulhusbandryof environ- sets-buildings and equipment,for example--arevalued mental capacitiescan ensure sustainableand potentially as productiveassets and are writtenoff againstthe value larger flowsof incomein the future.The optimisticargu- of productionas they depreciate.Naturalresourceassets ment that human ingenuityis bound to find substitutes are not so valuedor adequatelyaccountediforin most for the naturalresourcesbeingdepletedmaybe generally instances,however, and their loss producesno charge in valid,but it would be imprudentfor societyto base its the national accounts against current income to reflect behavioron such optimism and wouldbe wrongfor econ- the decreasein potential future production.If a country omistsand accountantsnot to take rational precautions is exhaustingits renewableor nonrenewableresources, in case this does not occur. its current incomewill thus be inflated by the sale of Two main conceptualapproachesto deal with the de- natural assets that willeventually disappear.Differences pletion or degradationof natural resources have been in recording under the SNA may arise depending on proposed:the depreciationapproachand the "user cost" whethera resourceis publiclyor privatelyowned.Private approach. The principle of depreciationof man-made companies tend to take a long viewof the natural assets capitalcan be appliedstraightforwardly to the consump- they own, and many make provisionfor the decreasein tion of capitalembodiedin renewableand nonrenewable the capital stock of natural resources, and in certain resources (Daly,Chapter 2; Harrison,Chapter 4). Since countries tax legislationpermits such provisionsto be geologicaland ecologicalinformation on depletion or excludedfrom taxableincome.No such exclusionis ef- degradationcomesin physicalunits, this must be priced 4 SalahEl Serafy and Ernst Lutz or valuedin some way before some adjustmentcan be R-X would be the "depletionfactor" (or user cost) that madeto GDP to arrive at a correctednet product. Valua- should be set aside and allocatedto capital investment tion couldbe basedeitheron the principleof replacement and excludedfrom GDP, while X would represent true, cost,wherereplacement is possible,or on (the discounted that is, sustainable, income. valueof) willingness to pay. Present conventions would This method is flexible enough to handle changing valuethe depletedor degradedresourcesat currentprices levelsof extraction,movements in the discount rate, and whereavailable.If such a correctionwere effected,the alterationsin reserve estimates.Such alterationswould grossproductwouldremainunchanged, but the net prod- includenew discoveries, whichwouldchangethe reserve- uct wouldbe adjustedto reflect the depreciation of envi- to-extraction ratio. In the aboveformulathis is denoted ronmentalcapital that has occurred duringthe account- by n, that is, the life expectancy of the reservemeasured ingperiod. in years at the current period's extraction rate. The Because the depreciationapproach would leave GDP methodis not concernedwith valuingtotal reserves,but unadjustedand becauseit would wipe out from the net onlywith the fractionof the resourcebeing liquidatedin product the entire proceedsfrom natural resourcesales, the current accounting period, whichis valuedat current the user cost approach (see Chapter 3) has been pro- prices.That fractionreliesentirelyon physicalquantities, posed as a wayof properlytaking accountof depletionof since the price is the same in the numeratorand denom- mineralresources.Possessionof a natural resource con- inator.The method can be adapted to deal with mineral veyson its owneran incomeadvantagethat is deniedto extractionunder conditions of deteriorating qualityof the those withouta natural resource,and it is not satisfactory product and rising costs of extraction.Resourceowners to arrive at a measurementof zero net income, as pro- usuallyminethe richer depositsfirst, leavinginferiorde- duced by the depreciation method. The user cost ap- positsfor later periods,thus inevitably raisingthe cost of proach avoidsthe difficulties of putting a valueon the futureextraction. stock of the resource, but it relies on the conscious as- This method, like all accounting methods, does not sessmentof current extractionrates in relation to the indicatean ex ante optimalrate of depletion,but merely total available stock, measuredin physical terms.Depend- mirrors decisionsalready made by the resource owner ing on the rate of depletionand on a discountrate, the about liquidating his natural resource.The ownerusually revenuefrom the sales of a depletableresource, net of determines his extractionrate in the lightof manyfactors, extraction cost, can be splitinto a capitalelement, or user includinghis expectationof future price changes. If he cost,and a valueaddedelement,representing true income. decidesto extract20 percent of his reservesin one year, T-hecapitalelementrepresentsasset erosion,and it has then n in the aboveformulationis equalto 5; the income been proposedthat it shouldbe hypothetically (El Serafy content of his net receipts, using a 5 percent discount 1981) or actually(Ward 1982) reinvestedin alternative rate, wouldbe 25 percent; and the user cost to be rein- assets so that it continuesto generate income after the vested is 75 percent. If, however,he extracts only 10 resourcehas been totallyexhausted.Unlikethe deprecia- percent of his reserves,that is, plans to exhaust his re- tion method,this wouldseek to alter the reckoningof GDP source over ten years, then he needs to set aside for itself,not just of NDP. This methodwouldbe in harmony reinvestment 58 percent of his net receipts,and willthus with accounting principlesand woulduse current market enjoy 42 percent as current income. The correction pricesfor valuation purposes,but it wouldrequirea rule- needed to reckon "true" incomeout of natural resource of-thumb discount rate for converting the capitalsalesinto sales is higher the nearer the resource is to exhaustion, an income stream.It is alsorootedin a properunderstand- and lowerthe longerits life expectancy at current extrac- ing ofthe economic meanings of "value added"and "rent," tion rates. Onlya 1 percentreductionwouldbe necessary whichshouldnot be confused with assetsales. in net receiptsto arrive at "true" incomeusing a 5 per- How the net revenuecan be split into user costs and cent discountrate ifthe resourceis beingliquidatedover true incomeis explainedin Chapter3. One needs firstto 100 years. The choice of the discount rate materially decideon a discountrate, r, say 5 percent. Second,one affectsthe calculation.A high discount rate, whichde- has to determinethe number of periods, n, over which pressesfuture againstcurrent valuation,raises the ratio the resourceis being liquidated.This can simplybe read of "true" incomein current receipts. But alternativein- from the ratio between total reserves and whatever vestmentsmust be found in whichto sink the depletion amountis extractedin the current period.Then the for- factor (R-X) so that it can yieldthat much as a return.' muladeveloped by El Serafy(1981) is used to calculate the ratio of true income,X, to net receipts (exclusive of Resource Accounting extractioncosts),R: For resourceaccounting,data need to be collectedon 1 X/R 1 - renewableand nonrenewable natural resourcesprimarily *for XIR = I)n+1 the purposeof planningtheir long-runexploitationin 1 (1 + r)~~ economicactivity. pursuitof sustainable Severalindustrial and Resource Environmental An Overview Accounting: 5 countries,includingCanada,France,Japan,Norway, and urements in physicalterms. Physicalmeasurementsare the UnitedStates,havedeveloped resourceaccountsthat clearlyessential,and without them accountingin mone- are tailoredto their available resourcesand pollicy priori- tary terms is impossible.Built into the French approach ties. Some of the importantfeaturesof the F'renchap- is the assumptionthat a comprehensive physicalinventory proachto resourceaccounting are describedbelow. systemmust be in place beforeany changescan be pro- Insteadof the term "resourceaccounting"the French posed in nationalaccounting methodology. This is a point use the expression"patrimonial accounting," whichcould of viewshared by many,but there are many others who be describedas "accountingof the nationalenvironmen- wouldwantto see nationalaccountingmethodsadjusted tal heritage" (Theys,Chapter 7). This is broader than gradually as measurements becomeavailable. resource accounting because it includes, for example, cultural heritage in addition to natural resources. The Linking Environmental and Resource French resource accountingapproach is jintendedulti- Accounts to the SNA mately to relate economicgrowth to the quantities of natural resourcesthat haveto be used up or imnported to The current version of the SNA, whichhas been in effect make economicgrowth possible.Such a syst.em would since 1968, does not contain an explicitenvironmental also help to optimize the economicvalue of available dimension.The ongoing SNA revisionwas mandatedby natural resources, determine the fraction of GDP that the U.N.Statistical Commission to simplifyand clarifythe should be set aside for the efficient protection of the existingsystem rather than to propose radical changes. environment, and orient economic growthso that it does The Commissiondesired to maintain consistency in not threaten ecosystems. time series,evenif the series containedconceptual short- When fullydeveloped,the systemwould be versatile comings. and serve various ends. It would optimize the use of Amongenvironmentalists and economists withenviron- natural resourcesas factors of production (for example, mentaland resource concerns,there are severalschools inversionof a quantitativeinputloutputtable that would of thought about the best approach to the accounting indicatethe intermediateuse of natural resourcesin the problem (Norgaard,Chapter8). Some advocateenviron- productiveprocess);it would describe the economicas- mental accounting in physical terms and havelittle inter- pects of resourceuse (such as whichresourceswouldbe est in establishing any linkagewith the SNA. Their aim is marketedand in what quantitiesand values,how to im- to use indicatorsof physicalchange to influencepublic provethe productivityof processingindustries to opti- opinionand environmental policies.At the other end of mizethe use of natural resources,and what the opportu- the spectrumare those who feel that environmental ac- nity costsare of alternatives); it wouldtreat resourcesas countingwould not have an adequate effect unless the "environmental goods" (taking into account changesin accounts are monetized and integrated into the SNA, the qualityof the environment, the costs and benefitsof whichwouldproducean adjustednationalincomethat is environmental policies,and the economicconsequences more sustainable. of alternativeenvironmental policies);and it wouldtake We believethat environmental accountingin physical stock of the national environmental heritage and define terms is essential,particularly as this wouldcovercollect- the long-termimplications of its transformations, so that ing data that indicatethe directionand rate of changein it could be preserved for future generatiDns.Since re- the quantityor qualityof a resource.At the same time, sourcesto developsuch a comprehensive systemare nec- werecognizethat "monetization," to the extentpossible, essarilylimited,stress is placedon satisfying the needsof is importantas welland that a linkagewith the SNAand the policymaker. Althoughit would be easier to collect an adjustment of the current incomeconceptsand meas- environmental data in the form of flexiblereports on the urementsare urgentlyneeded. Giventhe current state of state of the environmentand country profiles,the need the art, however,we believethat more conceptual and for developing a systemof environmental accountsis par- empiricalwork is necessarybefore GDP and NDP in the amount,so that the informationis standardized, exhaus- core of the SNA can be replacedby more sustainableGDP tive, summed up in physicaland monetary terms, and and NDP. That is whywe, as an interimstep, encourage comparable in time and space. The long-termgoal is to the construction of satelliteaccounts,linkedwith the SNA, match the standards already reached by national (eco- in whichthe adjustmentswould be made (see Chapter nomic)accounting,whichmake the SNA such a powerful 12). In other words,by havingsatelliteaccounts,the user planningtool forshort-termeconomicmanagement. couldcomputesustainableGDP and NDP (SGDP and SNDP) The French approachis only one amongs severalbeing in them. This half-way solution would not represent a pursuedin industrialcountries(for example,Norway has threat to the historicalcontinuityof GDP but has a fair been using resource accountsfor severalyears; see Alf- chance of being adopted. If it is adopted, national ac- sen, Bye, and Lorentsen1987).The French approachis countantsmaytake the issues discussedhere more seri- to build up balance sheets of resourcesand to monitor ouslyand mighteventually be willing to adjustthe core of their change from year to year, with emphasison meas- the SNA itself. 6 SalahEl Serafy and Ernst Lutz Bartelmus(Chapter 11) discussesvariousoptions for faultypolicyadvice.Such readingsfrequently exaggerate linkingor integratingenvironmental and resource issues income and thus encourageconsumptionand promote with or into the SNA. His chapter was commissioned by habitsof behaviorthat cannot be sustainedoverthe longer the workshoporganizers to summarizethe views and term. approaches expressedat the workshops. An interestingargument over "desirableand practica- ble" adjustmentis highlightedby the approachesregard- Constructing Environmental and Resource ing depletableresourcesof Harrison(Chapter 4) and El Accounts for Developing Countries Serafy(Chapter3). Both are in fundamentalagreement about what constitutessustainableincomeand what does not. Harrison wouldwork withinthe existingframework In order for resource concerns to be reflected ulti- ofteNAbprevighedininofialemd matelyin the SNA and in policymaking, it is necessaryto of the sNA by preservingthe definitionof final demand makeprogressnowat an operationallevelso that govern- mentofficials, nationalaccountants,and economists alike capital as a parallel entry to consumptionof man-made cantsee howf environntalt and resucon-mists , natioinclu ali capital,withappropriateadjustments to NDP. Further,she can see how to include environmental and resource con-' cerns in the calculations. But it is clear that the develop- argues that income measuresshould exclude all capital s cea tht te dvelp- cers i th cacultins.Butit consumption and thereforethat net productsshould be ment of environmental and resource accountswill take usdto ind theleve of eoni ctivityuad it time.~~~~~~~~~~~~~~ time. This fact, however, should ttsia Thsfc,hwvr.hudntke not keep statistical n and used to indicate development overthe time.level of economic El Serafy, activity by contrast, and re- would its planningofficialsin developing countriesfrom initiating defelthendistinctioet intermeit and finlde- relevant work now, especiallyon minerals or forestry, mand th at theeo n atu and finalde- wheredata to a largeextent are alreadyavailable. In the bved basgeing sale of natural capitalmust not caseof Indonesia,Peskin (Chapter9) arguesthat a local researcheffortshouldstart right away, supportedinitially of that incomeshouldbe excluded from GDP itself,as well withperiodicconsultantinputs. Ideallynot only environ- as from the net product. Thus the GDP measurement mentalhbut also other important nonmarket factors couldcontinueto be used extensively, as is nowthe case, metl bu als ote imoran nonsarket factorsndgidcooicpliy should be consideredin an expandedaccountingstruc- to describeperformanceand guideeconomicpolicy. ture. This iea iselabortediChaptrNorgaard (Chapter8) is skepticalabout the economists Repetto and others (1987) have applied resource ac- and accountantsconcernedabout the environmentever Reetito feand fothers( resourcer ac- being able to agree on a set of corrections that would counstin to feliand forvestrreourest g ionesa. For simplyrectifyand fillin gaps in the existingSNA to pro- radationnet of regrowthand suggestedthat it be treated duce one aggregatefigure expressedin monetaryterms. rike depreciationof man-madeassets, that is they pro- He claimsthat the existingSNA contains contradictions likeddereduciaong is,pthep o oe maN-aDe assets,thmated becauseit is basedon conventions and reflects consensus posed reducing the NDP by the estimated depletion.A similarapproachwas followed forvaluingthe depletionof rather than being built on deductivereasoning.He does fulmreservesacht wasee rservationsabout this aetnd an not viewsustainabilityas implicitin the definitionof in- fuel reserves (but see reservationsabout this and an alternativeproposal in El Serafy Chapter 3). Another come, which both Daly and El Serafydo, but as an alternat proposal sive inE Sersa1y a 3. Another ter "ethical" goal, representing a "separate social objective empirical stud e Maona and Aoilren18 esiaTed thea of development strategies." He believes the undervalua- cost~~ ecnm ofsi rsonJv to the. . anua Th tion of the concerns of future generationsreflects the amountestimatedwasUS$350millionto US$415million, whichis slightlyless than 0.5 percent OfGDP.Morethan nonparticipationby future generationsin the capitalmar- 95 percent of this cost is the on-site cost of declining kets of today. These two studies have madevaluable productivity. . conA more conventional view wouldascribesuch underval- productivity.Thnese two studies have madevaluablecon- uto oteueo o ihadson ae hc tributions,but it is lear that further empiricalwork is uces the ue of tur nbei almost to nhing nedd(e Catr1) reduces the value of future net benefits almost to nothing the more distant the future. Since futuregenerationswill never be able to participate in today's capital markets, A Variety of Approaches,but a CommonTheme the surest way of reflecting their preferencesis to use lowerdiscount rates. Norgaard is raising questions re- A varietyof approachesfor amendingthe SNA are pro- garding the economicapproach to the "sustainability of posed by variousauthors in this volume.This, however, development," whichis based on accountingthat relies should not detract from the central theme argued by all on market valuations.He espouses "methodological plu- of the authors: in their present form the guidelines for ralism" in the belief that a multiplicityof perspectives income calculationunder the SNA leave out important wouldensurethat "all valuesare respected to the extent aspectsof economicdevelopment that shouldbe brought possible,"so that decisionmakers haveinformationalert- into the accounts.Theseguidelines nowproducereadings ing them to "as many aspects of environmental and re- of levelsof activityand growthover time that can lead to sourcephenomenaas possible." Norgaard,however, does Environmental An Overview and ResourceAccounting: 7 not spell out how such alternative value systerns can be Revenue,and the Supply of Petroleum." The Journal of established or used; nor does he speculate on the sort of Energyand Development 7(1, Autumn):73-88. solutions they would produce. Hicks,John R. 1946. Valueand CapitaL2nd ed. Oxford:Ox- There are other areas in which the workshop partici- ford University Press. pants have expressed different points of vievw, but the Keynes, John Maynard. 1936. The GeneralTheoryof Employ- main message this volume hopes to convey is ihe urgent ment,Interest, and Money.London:Macmillan. need to recognize the shortcomings of the cun-ent meas- Leipert,Christian.1986. "SocialCosts of EconomicGrowth." ures of income and to work toward a more sustainable Journalof EconomicIssues20(1):109-31. concept and measurements-a common thread in all the . 1987. "DefensiveAusgaben in der Bundesrepublik contributions included here. Deutschland, 1970bis 1985:Absolute Werte und Relations- zahlenmitdem BSP."International Institutefor Environment Note and Society, Berlin.Processed. Magrath, William, and Peter L. Arens.1987. "The Costsof Soil 1. J. M. Keynes(1936)first introducedthe conceptof "user Erosionon Java:A NaturalResourceAccounting Approach." cost" in relation to capital equipment.He defined it as the WorldResources Institute,Washington, D.C.Processed. "maximum net valuewhichmighthavebeen conserved. . . if it Repetto, Robert, MichaelWells,ChristineBeer, and Fabrizio tthe equipment] had not been used."He describedthis concept Rossini.1987. "NaturalResource Accounting for Indonesia." as constituting"one of the links betweenthe present and the WorldResources Institute,Washington, D.C.Processed. future." (Seechap. 6 and its appendixof his GeneralTheory.) Schramm,Gunter.1986. "PracticalApproachesfor Estimating Projectanalysis of depletablemineralshas also made use of the ResourceDepletionCosts."In EdwardMiles,Robert Pealy, concept of user cost at the micro level (see, fcr example, and Robert Stokes, eds.,NaturalResourcesEconomicsand Schramm1986). PolicyApplications:Essays in Honorof James A. Crutch- field. Seattleand London:University of Washington Press. References UnitedNations,EconomicCommission for Europe. 1987. En- vironmentStatisticsin Europe and North America:An Ex- Alfsen,Knut, TorsteinBye, and Lorents Lorentsen.1987.Nat- perimentalCompendium. NewYork. ural ResourceAccounting and Analysis:The NorwegianEx- Ward,Michael.1982. Accountingfor the Depletionof Natural perience,1978-86. Social and EconomicStudy 65. Oslo: Resources in the NationalAccounts of DevelopingEcono- CentralBureauof Statisticsof Norway. mies.Development Centre PublicationCDIR(82)3010. Paris: El Serafy,Salah. 1981. "Absorptive Capacity,the Demandfor OECD. 2 Towarda Measure Social of Sustainable NetNationalProdudt Herman E. Daly Sustainable Income ment of NNP overestimates the maximum net product available for consumption. Consequently, NNP increasingly Thecentralcriterionfor defining the conceptof income failsas a guide to prudent conductby nations. has been wellstated by Sir John Hicks: Twoadjustments to NNP are needed to makeit a closer approximation to Hicks' concept of income and a better purpose isthgive of incom calctionsofinepracticl aairs guide to prudent behavior.One adjustmentis simplyto to giv pople antindicationeofsthegamountewhich extendthe principleof depreciation to coverconsumption theyoang onu impoverishinth msele, without, of natural capital stocks depleted through production. defolling out idea, it woldsem tat we mans o h The other is to subtractdefensive or regret- expenditures, dfne acan'su as theek duincome valuecwhcea mandstimu tableexpenditures necessaryto defendourselves from the can consumeduring a week,and stll expectto beg unwantedside effects of our aggregateproduction and well.off ahen o te wes he wasat te begin- consumption. Regrettabledefensiveexpendituresare in ning.~~~~~~~~~~~ esnsvs Thswe. epast ebte the nature of intermediategoods, costs of production off in the future;when he livesbeyondhis income he plans to be worse off. Remembering that the practical rather than final product availablefor consumption.To purposeof income is to serve as a guide for prudent correct for havingcounteddefensive in NNP, expenditures pupse of inom is to srv as..... a gud for prudent and subtracted theirsizemustbe estimated to arriveat conduct, I think it is fairlyclear that this is what the meaningmust be. (1946, p' 172). central an estimateof maximum or true consumption, sustainable centralmeaningmust be. (1946, P. 172). income. Thesame basic ideaof incomeholdsat the nationallevel. To summarize, let us define the correctedincomecon- Incomeis not a precise theoreticalconceptbut rather a socialnet nationalproduct"(SSNNP), as cept, "sustainable practicalguideto the maximum amountthat can be con- net nationalproduct (NNP) minusboth defensive expendi- sumedby a nation withouteventualimpoverishment. WVe tures (DE) and depreciationof naturalcapital(DNc). Thus, knowthat we cannot consumethe entire gross national product (GNP) without eventually impoverishingourselves, so wesubtractdepreciation and get net nationalproduct This definitionentails no interference whatsoeverwith (NNP), whichis usuallytaken as incomein Hick's sense. the current structure of the U.N.Systemof NationalAc- The centraldefiningcharacteristicof incomeis sustaina- counts(SNA). There is no loss of historicalcontinuityor bility.The term "sustainableincome"ought thereforeto comparability. Two additionalaccounts are introduced, be considereda redundancy.The fact that it is not is a not for frivolousor trendy reasons,but simplyto gain a measure of how far we have strayed from the central closer approximation of the central and well-established meaningof income and, consequently, of the need for meaningof income.No attemptis madeto deal with the correction. controversialissues of national income accounting,such But could we reallyconsumeevenNNP year after year as inclusionof leisure,disutilityof labor, householdpro- without impoverishing ourselves?No, we could not, be- duction, and services of long-lived consumer durables. causethe productionof NNP requiressupportingactivities The relationof incometo welfareis not addressed. sustainable,and the measure- that are not biophysically Since NNP is a familiarconcept, it remains only to 8 SocialNet National Towarda Measureof Sustainable Product 9 discussbrieflythe new accounts:defensive expenditures costfor man-made capitalby analogywith the more self- (DE) and depletionof natural capital (DNC),whichare by evidentcase for charginguser cost for natural resources. no meansnovelideas,but are not yet includedin as part The obviouscategoriesof natural capital are geological of an extendedSNA. (nonrenewable)and biological (renewable). Both, of course, are depletable.Depletionof geologicalcapitalis Defensive Expenditures necessaryfor industrial and agroindustrialproduction. Newgeological discoveriesdo not reversethe processof The explosionof the populations of humanbodies, of depletion,but they do extend the time span over which artifactsof all kinds, and of the populations of plants and the depletioncan continue. animalsexploitedfor human use that has happened in Depletionof renewablenatural capitalis in some ways the past fiftyyearsmightbetter be called an "implosion," a more serious matter becausereduced stocks or popu- since it has occurred in a finite environment. The term lationsof plants and animalswilllead to a reduction in implosion suggests a compressing togetherrather than an sustainableflow of resource inputs and ecosystemserv- expanding apart, a processof congestion, mutualinterfer- ices. Onlyby a future investment (reductionin consump- ence, and self-canceling collision.Defensive expenditures tion) could the larger sustainableflow be reestablished, reflect this increasinglyprevalentphenomenonoi mutu- and eventhat is often not possible.Evenin commercially allyinterfering,self-canceling activities. exploitedpopulationsthat are above the level of maxi- The categoryof defensive expenditures can be largeor mum sustainableyield and therefore would yield more small dependingon where the boundaries are drawn. with a smallerstock,the consumption of the stock dimi- ChristianLeipert of the InternationalInstitutefor Envi- nution is not a sustainablesource of income,but rather ronment and Societyin Berlinhas suggestedfivebroad capitalconsumption. categoriesof defensiveexpenditures. Geologicaland ecologicalinformation on depletion comesin physicalunits and must be priced or evaluated e Defensive expenditures inducedby the overexploita- in some waybeforeit can be subtractedfrom NNP. This tion of environmental resourcesin the general courseof willno doubt involvesome arbitraryconventions.Valua- economicgrowth,such as the costs of all environmental tion might be based either on the principleof replace- protection activitiesand expendituresfor environmental ment cost or on willingness to pay, whichever is less, in damagecompensation. order to be "conservative." It is not clearthat any greater * Defensive expenditures inducedby spatialcoricentra- arbitrarinesswould be involvedthan already exists in tion, centralizationof production,and associated urbani- current estimatesof depreciationof man-madecapital, zation,such as increasedcommuting costs,housing,and especially if one counts obsolescence or "moral" depreci- recreationcosts. ation as wellas physical. * Defensive expenditures inducedby the increased risks Income, as Hicks emphasized,is not a theoretically generatedby the maturation of the industrialsystem,such precise concept,but rather a practicalguide to prudent as increasedexpendituresfor protection against crime, behavior.Surelysomereasonableallowance, howeverim- accident,sabotage,and technicalfailure. precise,for depletionof natural capitaland some correc- * Defensive expenditures inducedby the negative side tion for the double countingof defensive(intermediate) effects of car transport, such as traffic accidentswith expendituresare required if the income concept is to associated repair and medicalexpenses. remain a guide to prudent behaviorby nations, whichis * Defensive expendituresarisingfrom unhealthycon- its fundamental reasonto be. The two adjustments are in sumptionand behavioral patterns and frompoor working keepingwith the central idea of income and involveno and livingconditions,such as costs generatedby drug disruptionof the existingSNA.The need for such adjust- addiction,smoking(bothactiveand passive), and alcohol. mentshas already led independent scholarsto begin work on measuringdefensiveexpendituresand the depletion These categories are neither exhaustive nor mutuallyex- ofntrlcpa.Whtemisstogvofcalttu clusiveand are naturallysomewhat arbitrary.Category1 andnforal cogi. .tio te to j e aimedat fit better under DNC.But it might, in our classification, representsexpendkeeping a start at subtracting the incomeconceptas a reliableguideto prudent representsa start at subtractingexpenditures thlaido not bhvo nawrdta a hne infcnl ic reflectany increasein the net product available for con- naion in aounting was firsinitionalize sumptionwithoutsumptionwithouteventualimpovershment.national eventualimpoverishment. income accounting was first institutionalized. Depletion of Natural Capital Reference This is entirelyanalogousto the depreciationof man- Hicks, Ox- JohnR. 1946.Valueand Capital.2nd ed. Oxford: madecapital.In fact, Keynesjustifiedthe conzeptof user Press. fordUniversity of Income The ProperCalculation NaturalResources from Depletable Salah El Serafy Recognitionis growingthat income is not being accu- revenue derived from the sale of natural resources as rately calculated for economies based on natural re- currentincome,or rent, that is available for consumption. sources.Somewouldevensay that, for these economies, If the revenueaccruesto the publicsector, it can be used nationalaccountingmethodsproducemisleading calcula- just like revenue from any other source, such as the tions. They lead to measurementsthat neither faithfully proceedsfrom income taxes. Giventheir short perspec- describeeconomic performanceex post, nor can theybe tive,the politiciansin charge of such economiesoften do used as a basis for useful policy proposals.For such not want to be remindedthat the revenuederivedfrom economies,current accountingpractices exaggeratein- liquidating their country'snatural assets is neither recur- come, encourage unsustainablelevels of consumption, rent nor sustainable.And many a developingcountry and obscure the necessityto implementgreatly needed rejoicesin havingits leadershippraisedfor illusory rapid policyadjustment.The problemis relevantto practically economicgrowth, apparentlyhigh rates of saving and all countries where nonrenewableresources are being investment,and deceptively stable or near-stable price exploitedand where renewableresources are being run levelsbroughtabout by import surpluses. downwithoutbeing restored. But it is most acute where Such apparentprosperityis bought at the costof asset such resourcesare being exploitedin the public sector, erosion-a sure recipefor future economicdecline.Thus eitherdirectlyor throughforeigninterests. natural resourcesare exportedand used up to prop up a In the moreindustrialized countries,whereexploitation truly unbalanced, but seeminglycomfortable, external typically occurs in the private sector, tax allowances for balance.An overvalued exchangerate inevitably develops, depletiontend to correct the calculationof the "value and relativeprices are upset as a "Dutch Disease"syn- added"believed to be generatedby such activities. Such drome sets in, wherebythe prices of nontradablegoods correctionof courseis effectedas depreciation,reducing and servicesrise in relationto those of tradables.' Con- the gross product by an elementto coverdepletion.The sequently, the economy'scapacityis reduced to produce correctionis frequently not exact, but it is a step in the and exportthe productsof nonnatural-resource-based ac- right direction.This process is being helped by the fact tivitiesthat could providebadlyneeded employment and that whenproperties containing marketablenatural re- (sustainable) future income.Any comparative advantage sources,such as subsoil deposits,exchangehands, their the countrymay havegets sacrificedduring a period of marketvaluetends to reflect their natural-resource con- ephemeralprosperityand illusory growth.This is partic- tent. Bycontrast, no such correctionis made in most of ularlytrue wherethe exhaustionof the resourceis immi- the developingcountries, whose economiesdepend in nent. Needlessto say, the citizensof these countriesfind varyingdegrees on the exploitation of their natural re- it onlytoo easyto adjustto a higherlevelof consumption. sources, such as mineral extraction or the commercial When the bonanza ends and the natural resource is loggingof forests to maketimber and paper. This prob- almost exhausted,standards of living have to fall, and lem, therefore, is one of paramountimportancefor the intolerablepressures develop on the external balance. developing world. Quite often the country finds itself saddled with a high The practice in these countries followsthe United externaldebt,whichit contractedin the prosperousyears NationsSystemof NationalAccounts(SNA),whichtreats when it had overestimated its capacityto borrowand its 10 Calculation The Proper of IncomefromDepletable NaturalResources 11 creditors had mistakenlyassumed that the prosperity into a definition of income as that amountwhicha person would continue.The governmentthen finds itseliF in an can consumeduringa givenperiod and still be as welloff impossible situationin whichthere are no margins left to at the end of the period as at the beginning. 2 More providea cushionfor urgentlyneeded policy adjustment weare told in no uncertainterms that: specifically, that should havebeen initiatedyearsbefore.The halcyon if a person's receiptsare derivedfrom tation of a wastingasset, liableto giveout the period of plenty willhave come to an end, and all the . .. exploi- at a future putativeeconomizing that had been done during those date, we shallsay that his receiptsare in excessof his years is seen in retrospectto havebeen false and futile. income"(Hicks1946,p. 187). Defective accounting had led economicbehaviorand pol- icy analysis astray. Natural resources are certainly "wastingassets" if they The fundamental principlethat is flouted by applying are nonrenewable (for example,minerals),or, if they are conventional national income accountingto depletable renewable(for example,forestsexploitedfor timber,fish- resourcesis the separationthat must be maintainedbe- eries, or agricultural soil), are not actually renewed tween incomeand capital.This principletells us that if through careful maintenance,thus causing the receipts you liquidateyour assets and use the proceedsfor con- fromtheir exploitation to giveout in the future.Ignoring sumption, you are living beyondyourmeans,and in doing this elementaryfact makes a mockeryof what has been so you are undermining your abilityto create future in- passingas economicanalysisand policyprescriptionfor come. The accountingprofessionwas born, in the late economiesbasedon natural resources(and in particular, Middle Agesin the city states of the Mediterranean basin, those based on minerals),in which no effort has been largelyto separate from the proceeds accruingto mer- madeto compensate for drainingthe nationalwealth by chants that part which they could use to finance their depletingthese resources.Maintainingcapital intact is families'current needs. Those merchantshad to guard not a marginalissue.It is centralto all economicbehavior againstconsuming their capital,whichwas the sourceof and analysis,and it is a poor economistindeed who is their continuedwell-being. From its infancythe account- unableto tell capitalfrom income. ingprofession specifically has addressed this task. In pres- ent-daylanguagethe accountantswere asked to define Conceptual Background sustainablelevelsof consumption,and they could do so onlyby attemptingto keep capitalintact. The confusionof capital and income,whichhas been The same principlewastaken up by AdamSmith,who the standardapproachto incomecalculationin this area sawcapitalas a means"to increasethe productivepowers and which derives support from the SNA, is becoming of labor" and as an asset whosemaintenance was imper- increasingly untenable.This chapter offersa wayto esti- ative, since it "is alwaysrepaid with great profit, and mate the true incomecontent of the proceedsfrom min- increasesthe annual produce by a much greater value eral sales. The treatment of incomefrom renewablere- than that of the support whichsuch improvementsre- sources such as forests, which have to be maintained quire."The Wealthof Nations(Smith1776) states that: through replanting, or fisheries, which have to be re- The gross revenue of all the inhabitants of a great stocked,is more straightforward. Where such replanting country, comprehendsthe whole annual produce of or restocking is effected at technologicallyacceptable country,ncomprehends the who l annuea produ o rates that wouldkeep capitalintact,these activities could lan an laor th nea reeu,wa thi .ean be charged against the gross returns from the natural free to them after deductingthe expense of maintain- ing; first, their fixed;and, second,their circulating cap- resourceto obtain the net valueadded generated;this is ital; or what, without encroaching un c .r , similar to the way capital consumption is treated in na- ital; or what, without encroachingupon their capital, ioaacunsSilesonloblngtoheam they can place in their stock reserved for immediate conal accounts. Sofl erosion also belongs to the same consumption, or spn.pntersbsseieovn category of a natural resource whose depletion can be ord icnsum, amuspmend uoTheir subsiste oo. n offsetby restoration,and the cost of restoration should iences, and amusemn. their r eat tooeisei proportion,not to theirgross,but to their neat revenue. be chargedagainstthe gross product of the soilto obtain a true estimateof the net product. The SNA, in failingto distinguish betweenunsustainable But quite often, particularlyin poorer countries, the receipts, derived from the sale of natural assets, and resourceis not restored to the same levelof activity.As a sustainableincome,producedby the factors of produc- result the valueadded that appears to be generatedcon- tion, disregards the fundamental Smithian concept of tains capital elements that should be removed.In this "neat revenue," whichshouldguidethe consumption and casethose whoestimatenationalincomeshouldimpute a assessment of the wealthof the revenuerecipienlt. capitalconsumptioncharge based on technically accept- The distinction between capital and income has re- able criteria against current receipts to obtain the true mainedcrucial throughoutthe development of econom- incomefromthese activities. For soil erosion,some esti- ics. In the present day, Hicks paraphrasedthis principle mate maybe necessaryof the decliningpowerof the soil 12 SalahEl Serafy to produce, and this can be based, for example,on de- quenceof acceleratingthe liquidation of subsoilassets is cliningland yieldsover time. This chapter, however, ad- applauded as good economicperformance and is con- dressesonlythe problemof estimatingincomegenerated fused with the growth that comes from labor, capital from depletable,nonrenewable resources. formation,technological progress,and efficient organiza- My thinking on this topic began to be shaped by a tion. The revenueaccruingto countriesthat depletetheir senseof discomfort overwhat I thought to be an inappro- natural resources in this way is reflected in increased priate use of economicconcepts when the pricing of savingrates and investment coefficientsand in improved petroleumbeganto attract the attention of economists in parameters, such as incremental capital-outputratios the early 1970s. To my mind the oil market had long (ICORS), which shed deceptively favorablelight on the been an oligopsonistic market, dominated by powerful economic performanceof such economies. Policyadvice multinational conglomerates. Economicanalysis had con- basedon these calculations becomesdulled at best-and tributed little to understanding how prices were deter- downright wrongat worst. minedin that sort of market,beyondthe traditional mod- The conceptof rent in this situationis profoundly mis- els of oligopoly theory, which concentrated on how used and totally misapplied.In the perception of the equilibrium wasreachedrather than on the levelof prices classicaleconomists the rent that qualifiedas valueadded producedby it. Later,when oligopsony in the petroleum derivedfrom the indestructiblepowersof nature. 5 Such marketgavewayto an apparentmonopoly insti- allegedly revenueis clearlysustainablewherethe powersof nature tuted by the Organization of PetroleumExportingCoun- to reproduce it are not impaired,and it can therefore tries (OPEC), the price increaseswere too facilelyattrib- legitimately be counted as income. The surplus, net of uted to the powersof the exporters'cartel. extractioncosts, emanatingfrom liquidatingnatural re- It was curious that many analysts overestimated the sources, however,has little kinship with either rent or competitionprevailing in that market before 1973 and quasi-rentas definedby Marshall(1920). underestimated it afterward,emphasizing OPEC'S monop- There seemsto be no alternative to bringingthe capital olypower.It wasevenmore curiousthat manyanalystsin nature of such exploitation into the open and integrating the 1970sappearedto think that iffree competition were this in all economicthinkingand measurements, not just to prevail,competitive equilibrium wouldindicatea price to gauge welfareadequately, but to savethe disciplineof equalto the marginalcost of extraction,whichwas-and economicsfrom disrepute.Even noneconomists have on still often is-referred to as production,and that it was occasionrightly perceivedthat mineral extraction reve- only becauseof the allegedcartelizationof supply that nues are not whollycurrent income.A smalland under- the price wasable to rise abovethat cost. 3 developed country such as Libyacould thus legislateas This constructionwas later challengedby those who earlyas 1963 (whenit firstbegan to extractpetroleumin were aware that the price of an irreplaceablenatural commercial quantities)that at least 70 percent of petro- resource,such as petroleum,should perhaps contain a leum proceedshad to be allocatedto development. The user cost or capital element,representingthe erosionof perceptionwasstrong in that verypoor countrythat this the resource.Even under free competition, the marginal uniquewealth truly belongedto future generationsand cost of extractioncould not possiblyindicatean equilib- should not be squanderedon consumption, as would be rium price level, since the cost of extraction is tanta- impliedby treating its sales as current income.To recall mountto the cost of asset liquidationand cannot deter- Hicks'sstandarddefinition,currentincomeis that part of minethe valueof the veryasset being sold.Hotelling had receiptswhich, if devotedto consumption,would leave to be resurrected and used with great dexterityby an the earner no worse off at the end of the accounting importanteconomistlike Solowfor a more convincing period than at its beginning. explanation of petroleumprice increasesbeforethe eco- nomic professioncould be persuaded. 4 But it has not Weakness of the Depreciation Approach been completely persuaded,and doubtersstill abound. Parallelto the microeconomic confusion aboutthe pric- Likeother economists of the same bent, I thought first ing of natural resources, other inaccuracieshave also of usingthe "capitalconsumption" or "depreciation" ap- beenperpetratedand havedistorted thinkingabout mac- proach to treat income from depletable mineral re- roeconomicsin countries where the exploitation of de- sources.As the resource is depleted by the quantity of pletablenatural resources is significant.If the marginal extractionduringthe year,the amountof depletion,val- cost of extractionwas the only cost, then any surplus ued at current prices, can be deducted from the gross accruingto the sellers was pure rent and represented proceeds,just as, for example,the depreciation of capital valueadded to be includedin the gross domestic product equipmentused for manufacturing is subtractedfrom the (GDP). This certainlyis implied by the accountingprac- gross valueadded by manufacturing activities.The min- tices currentlybeingused underthe SNA. Basedon these eral extraction earnings can still be reckoned in GDP, practices,the expansionof economicactivityas a conse- provided that the valueofthe depletionis deductedfrom Calculation The Proper of IncomefromDepletable NaturalResources 13 it for calculating net income.The problem of the exact zero-a measurement that is not particularly For edifying. valuationof capital consumption in this case appearsto the gross product this approach would not make any be of secondaryimportance.Much more impcrtant is to adjustmentand would simplyeliminatethe net product try to make some adjustment.Variousmethods are al- altogether.Such a measurementof net income would ready used to treat inventoriesand other capital assets belie the observablefact that havingsubsoilmineral de- used up in the processof production.Shortcuts,approx- posits to exploitgives their possessorsan income edge imations,and arbitraryestimationsare used throughout over thosewho do not havethat advantage. national income calculations, and no special harm can come from adding the depreciationof natural.resources Conversion to a Permanent Income Stream to the list. On reflection, however,I movedaway from this ap- Mineral depositsand other comparable marketablenat- proach,both for practicalas wellas conceptualconsider- ural resourcesare assets. Salesof assets do not generate ations. First the conceptual.It is wrongto describe as valueadded and should not be includedin GoP. They do current productionthat whichis not current production. vate addedand howeve ich inbe T to GDP is an importantmeasurement and is much more in generateliquidfunds,however, whichcan be put to alter- use than NDP (net domesticproduct).Even if NDP and its nativeuses.A countrymaychooseto spend the proceeds national parallelNNP are correctlymeasured,the whole (net of extractioncosts) on consumptionor investment apparatusof GDP withits structure,input-output relations, or any combinationof the two. But this is neither here and changes over time would remain incorrectly calcu- nor there. Froman accountingpoint of view, however, an lated if revenuesfrom depletableresourcesare counted incomecontent of the net receiptscan be estimated.This as valueadded in GDP. incomecontent shouldbe part of GDP since it represents It is not by chance that the gross product, rather than valueadded. The argumentfor this proceedsas follows. 6 the net product, is the preferredquantityfor macroeco- If an owner of a wastingasset is to consumeno more nomic analysis.It is often used as a denorninatorfor than his income,he must relendsome part of his receipts crucialmacroeconomic ratios, with the nominatorbeing so that the interest on it will make up for the eventual moneysupply,exports,imports,externaldebt, debt serv- failureof receipts from the wasting asset in the future. ice, savings, capitalformation,and so forth.As Hickshas This proposition,which can be found in Hicks (1946 suggested,the conceptof net incomeis usually eschewed chapter 14), suggestedthe need to convertthe mineral because it is alwaysarbitrary. It relies on estimatesof asset concerned into a perpetual income stream. The depreciationand inventoryuse that are a miixed bag of finiteseries of earningsfrom the sale of the resource,say hlistorical costs and estimationbased on accountingcon- a ten-year series of annual extractions leading to the ventions, tax lawsand allowances,and insurance com- extinctionof the resource, has to be converted to an ven ration taxlaws s, andallowasjcves, vansuratonce bcom- infiniteseries of true income, such that the capitalized pany practices, as well as subjectivevaluationby eco- valuesof the two series are equal. From the annual earn- nomic agents who do the reckoning and wvho have a insfosae,nicmepronttcnbepntn variety of expectationsabout the future (Hlicks1981, ings from sales, an incomeportion that can be spent on chap. 9). If an incomecorrectionis to be made,it should consumption should be identified;the remainder,a capi- apply thereforeto the gross product itself,and it is not tal element, should be set aside year after year and in- enough to effectthe adjustmentat the net product level. vestedto create a perpetualstream of incomethat would Another reason whyI discarded the depreciation ap- providethe same level of true income,both during the proach to rectifyingincome accounting for depletable life of the resourceas wellas after the resourcehas been resource activities is the fact that countrieswith market- exhausted.The two constituent portions of current re- able natural resourcesare evidentlybetter ofi than those ceipts need to be defined:the income portion and the withoutsuch resources,and they can enjoya higherand capital portion. Under certain a,ssumptions, which are sustainablestandard of livingthan the latter by virtueof neither too restricting nor too unrealistic,the ratio of their resourceendowment. Such an advantage shouldbe true incometo total receiptsis: reflectedin calculating the incomeof both groups.If we 1 deduct from the gross receiptsfrom mineralsales in any XIR = 1 - ____r_n_ oneyear an amountequalto the depletionalongthe lines ) describedabove,the valueof net income fromthis activity where X is true income, R the total receipts (net of becomes zero. Where a countryderives 100 percent of extractioncost), r the rate of discount,and n the number its receipts from,say, petroleumextraction--anextreme of periodsduring whichthe resourceis to be liquidated. case of a Saudi Arabia-the depreciationapproach (ig- R-X would be the user cost or depletion factor that noring the multipliereffectof ancillaryactivitiesrelated should be set aside as a capital investmentand totally to extractionas wellas the contributionof other sectors excludedfrom GDP. On the expenditureside, this deple- to valueadded)wouldgiveus a GDP of 100 and a NDP of tion factor would represent a disinvestment that should 14 SalahEl Serafy be set against capital formationin new assets, so that Figure3-1. Income Contentof MineralSalesat Various total expenditure wouldstill be equalto the true income. Life Expectanciesand DiscountRates If all of the receiptswere devotedto consumptionand if new capitalformationfell short of the depletionfactor, the accounts should show a negative value for capital 1.0 r = 10percent formation,thus reflectingthe disinvestment that had oc- curredin the accounting period. The ratioXIR dependsonly on two values: the reserves- to-extraction ratio, that is, the life expectancy of the re- sourcemeasuredin years,and the discount rate. A country 3 percent that liquidates its mineralreservesoverfiftyyearsneedsto 0.8/ set asidefor reinvestment a smallerportionof its receipts r = 2 percent than anotherthat liquidates its reservesovertwentyyears, and thus it can count a larger portion of its receiptsas r4I income.Similarly, if the receiptsset aside can be invested at a higherinterestrate, say 10 percent,a higherportion II wouldbe reckonedto incomethan if the interest was 5 percent.According to this formula, witha discountrate of ' 1 5 percent, a countrythat liquidatesits natural resource r = 1 percent overten years can consideras incomeonly42 percentof E its annual receipts,whileanother witha fifty-year horizon can reckonas muchas 92 percentof its annualreceipts to 0.4 currentincome.At a 10 percentdiscount rate the former's I current incomewouldbe 65 percent of the receiptsand 1l the latter's 99 percent, whichwould require almost no / correction to GDP estimates as currentlymade. Figure3-1 shows the ratio XIR (the portion of total receipts that is true income) as a function of the life 0.2 expectancy of the resource,N, measuredin years, at ten alternativediscountrates, decreasingfrom 10 to 1 per- cent. The same relation is given in Tables3-1 and 3-2. Table3-1 showsthe income content of mineral sales at elevenalternative discount rates from 0 to 10, for re- 0...,.l.,.l.,.l.,.Il.,.l...,i.l.,.l.,.l sourcelife expectanciesof 1 to 100 years.This is shown 0 40 80 120 160 200 as percentageshares of the receipts that are currently Ratio of reserves to extraction (A being treated under the SNA as if they were whollyin- (Lifeexpectancy in years) of resource come. Table 3-2 is the complementof Table 3-1 and Note:r = alternative discount rates. presents the user cost content of the annual sales, ex- pressed also as a percentage of total receipts, for the same discountrates and life expectancies. This percent- the utilityof the resourceto future generations.Current age representsthe capital elementthat, I believe,should practicesfor calculatingGDP accordingto the injunctions be excludedfromGDP as a depletionfactor. of the SNA are thus seen to be built on one of two The calculations show that the present practice of untenablepremisesor a combinationof both: that the counting mineral sales proceeds as current income im- natural resource being liquidatedwould last foreverand pliesthat the fraction that the welfareof futuregenerationsdoes not matter. 1 (1 + r)n+l Clarification of the User Cost Approach equalszero in the previousformula.For onlythen would In defenseof this approach,the following pointsshould XIR = 1. This would be obtained, irrespectiveof the be clarifiedand emphasized. discountrate, by havingn = oo;or alternatively, wheren is finite,by havinga veryhigh valueof the discountrate * A discountrate must be chosen. This decisionhas so that r tends to infinity.Such a high rate of discount to be arbitrary,but the arbitrarinessof the discountrate implies a very strong time preference of the resource is not in principle any differentfrom the arbitraryesti- ownersand is tantamountto setting a very lowvalueon mation methods used extensively under the SNA. A rate The Proper Calculation of Income from Depletable Natural Resources 15 Table 3-1. Income Content of Mineral Sales (XIR) (percent) Life expectancy of the - Discount rate (r) resource(A)(years) 0 i' 2 3 4 5 6 7 8 9 10 1 0 2 4 6 8 9 11 13 14 16 17 2 0 3 6 8 11 14 16 18 21 23 25 3 0 4 8 11 15 18 21 24 27 29 32 4 0 5 9 14 18 22 25 29 32 35 38 5 0 6 11 16 21 25 30 33 37 40 44 6 0 7 13 19 24 27 33 38 42 45 49 7 0 8 15 21 27 32 37 42 46 50 53 8 0 9 16 23 30 36 41 46 50 54 58 9 0 10 18 26 32 39 44 49 54 58 61 10 0 10 20 28 35 42 47 52 57 61 65 15 0 15 27 38 47 54 58 66 71 75 78 20 0 19 34 46 56 64 71 76 80 84 86 25 0 22 40 54 64 72 78 83 86 89 92 30 0 27 46 60 70 78 84 88 91 93 95 35 0 30 51 66 75 83 88 91 94 96 97 40 0 34 56 70 80 86 91 94 96 97 98 50 0 40 64 78 86 92 95 97 98 99 99 60 0 46 70 84 91 95 97 99 99 99 100 80 0 55 80 91 96 98 99 100 100 100 100 100 0 63 86 95 98 99 100 100 100 100 100 Note: Figuresare roundedto the nearest digit. Table3.2. CapitalContent(or "UserC'ost") of MineralSales (1 - X/R) (percent) Life expectancy of the _ Discount rate (r) resource (IV(years) 0 1 2 3 4 5 6 7 8 9 10 1 100 98 96 94 92 91 89 87 86 84 83 2 100 97 94 92 89 86 84 82 79 77 75 3 100 96 92 89 85 82 79 76 73 71 68 4 100 95 91 86 82 78 75 71 68 65 62 5 100 94 89 84 79 75 70 67 63 60 56 6 100 93 87 81 76 71 67 62 58 55 51 7 100 92 85 79 73 68 63 58 54 50 47 8 100 91 84 77 70 64 59 54 50 46 42 9 100 90 82 74 68 61 56 51 46 42 39 10 100 90 80 72 65 58 53 48 43 39 35 15 100 85 73 62 53 46 42 34 29 25 22 20 100 81 66 54 44 36 29 24 20 16 14 25 100 78 60 46 36 28 22 17 14 11 8 30 100 '73 54 40 30 22 16 12 9 7 5 35 100 '70 49 34 25 17 12 9 6 4 3 40 100 66 43 30 20 14 9 6 4 3 2 50 100 630 36 28 14 8 5 3 2 1 1 60 100 54 30 16 9 5 3 2 1 1 0 80 100 45 20 9 4 2 1 0 0 0 0 100 100 :37 14 5 2 1 0 0 0 0 0 Note: Figuresare roundedto the nearest digit. 16 SalahEl Serafy of 5 percent or thereaboutscan be chosenas approximat- verywellkeep the reserves-to-extraction ratio unchanged ing what the classicaleconomists used to call a natural by raisinghis annualextractionwhenhe realizesthat the rate of time preference.This could be changed periodi- reservesare larger than he had thought. This will also cally,say everyfiveyears,guidedby changesin the long- translateinto higher income. term marketrates. * It is not necessaryto estimatethe absolutevalueof * Underthe proposedformula, the settingasideof part the total mineralreservesor to resort to what is known of the proceedsfor reinvestment is only a metaphor.The as "wealthaccounting."Neitheris it necessaryto predict ownermay dispose of his receipts any wayhe chooses. future prices. The owner of the resource does all the But he should be made aware of the fact that his true predictionsnecessary, and these are reflected in his an- income is only a fraction of his total receipts. Proper nual extraction,whichthe accountanthas to relate to the accounting should convey this fundamental message. size of the total reservesin order to estimateincome.By * Equallymetaphoricalis the process of calculating implication, it is assumedthat the unit valueof the total the yie!ds frominvesting the set-aside part of the proceeds resourceis the same as the current price. Suchvaluation, at the choseninterest rate. As stated previously, the rate appearingin both the numeratorand denominatorof the should approximate an availablemarket parameter that formulagiven earlier,cancels out, and what remains is wouldindicateprudent behaviorfor the asset liquidator the ratio betweentwo physicalquantities:the size of the and wouldguidehis decisionsabout extraction.Thus he reservesand the annual extraction,that is, the number of maydecideto delayextractionif the market interestrate, yearsremainingbeforethe resourceis exhausted.Specu- available for financialinvestment, appears lowerthan the lation about the ftuturecourse of prices, however, does rate at whichhis resourcewould appreciateif left in the occur, and this, as mentionedabove,affects the rate at ground. But he need not in practice sink his finds in whichthe resource is liquidated,but this is not the ac- physical or financial assets at that interest rate. However, countant'sproblem. he wouldbe wiseto seek such a rate as a minimum yield * The problemsof the terms of trade or of changed on his new investments.The so-calledHotelling Rule technology that mightlead to drasticchangesin the valu- states that if he left his natural resource alone, it would ationofthe resourceare not addressed here.Suchchanges appreciateat the market discount rate because of its haveto be acknowledged by the incomeaccountantswhen growing scarcity. they occur.The focusof this approach is on the volume * Likewise, the extractionschedule,assumedto be at of extractionin the accounting period as it relatesto the a constant rate over some time horizon, is also a para- total volumeof the reserves.In the manner of national digm and is used only for makingthe calculations. The accounting,the market valuationof the product is taken owner has a given resource. He may extract it for two as givenand is used merelyto weightthe volumein order yearsor twenty.Everyperiod he may decideto alter his to assessthe activity's contributionto GDP. plans, dependingon current prices and the expectations * The proposed methodcould be applied immediately thereof,by increasing or decreasing the annualextraction to mineral depositsthat are more or less ascertainable, rate. He is at libertyto do so. All the formulaneeds is such as petroleum, forwhichthe industryestimates proven the ratio between the total reservesand the amount ex- 7 reservesand publishes these estimatesregularly. But even tractedin the current period.Suppose an owner, whohad for petroleum,and certainlyfor metals, ownerstend to been planningto liquidatehis reservesover a ten-year mine richer and more accessibledeposits first, which period, decides to accelerate extractionbecause of an means that later extractionsinvolveprogressively higher expecteddeclinein future prices (reckoningthat, since extractioncosts. Risingextractioncosts can undermine his market share is small, he can do this with impunity, the sustainability of the activityas much as the physical that is, withoutdepressingprices)and now decideson a exhaustionof the resource.When market prices fall be- five-year horizon.All that is necessaryis to use the new lowextractioncosts,manyprevioussellers,still sitting on ratio of reservesto extraction,and this can be decided large deposits,find profitableoperation impossible. Esti- period by periodand changedeveryyear ifneed be. mation of the volumeof reserves therefore should be * The same appliesto the discovery of new deposits- adjusted downward by a factor that would reflect the or a downward adjustmentin reserves-usuallya tough risingfuturecost of extraction.Shortcutsfor such adjust- nut to crack. The new discovery does not have to be ment need to be devisedcaseby case. counted as income,as some have suggested.All that is * It is importantto remember that the issue here is necessary,if this approach is followed,is to alter the nationalincomeaccounting.Even if the identifiedglobal reserves-to-extraction ratio (A)in the calculations, ihat is, reserves of a mineral get adjusted upward,the fact re- if it is decidedto keep the extractionscheduleas before. mainsthat the reservesof individual countriesinevitably In this case, the discoverywill reflect itself in higher are depleted as they are exploited.Nationalincome ac- income than before, as shown by movingfrom left to countingshould reflect this individual national aspect of righton the x-axisin Figure3-1. However, the ownermay the activity. NaturalResources 17 of Income fromDepletable TheProperCalculation Conclusion infinite series X. The capitalized value of the finite series R, accruing in equal amounts over a period of n years, Although the user cost approach appears radical in that would add up to: it seeks to alter the calculation of GDPunder the SNA for r 1 1 certain activities, it is economical and practicable. It is an n | - + n+ld effective way of impressing on developing countries that ER* (= depend on the exploitation of subsoil deposits that natu- o1 1 ral resources are being exhausted as they are exploited. I + r The method proposed is in harmony with standard eco- The infinite series X would add up to: nomic concepts. The national income accounting prac- tices set out under the SNAdistort these concepts when X applied to depletable resources. They falsely call rent that X* 1 which is not rent, and include in value added that which 0 1 - + r is not value added. A second-best alternative would be to use the depreciation approach, deducting a depletion fac- Setting E R* = E X* and multiplying by the denomina- tor from an inflated GDPto reach a corrected NDP.The o o user cost proposed in this chapter would be the correct tor in both quantities, measurement of this depletion factor, not the "full-value" r depreciation, which, as argued above, would wipe out all X= R 1 - I the activity from the net product. I (1 +r) 1 The correction ought to be made in the flow accounts X/R = 1 - 1 of the SNAat the GDPlevel. It is not enough to record (1 + r)n+ depletion in balance sheets, reconciliation, or satellite 1- X/R = 1 accounts. This approach would make it unnecessary to (1 + r)n+l attempt to show in such accounts absolute values of total reserves and their annual changes-values that would be In thi ifmionit is asm at teripts I as arbitrary as they would be unedifying. Its adoption alternatively, they accrue at the end, the fraction XIR would lead to the proper understanding and measure- 1 ment of the special economic activity of depletable natu- would be 1 - . It is also assumed that the rela- ral resource exploitation, and consequently to better pol- (1 + r) icy analysis. tiveprices of the resourceand the goods and serviceson which the stream of income will be spent do not change. Appendix. Splitting Receipts into Income If there is reason to believe, for instance, that such goods and Capital and services will appreciate over time relative to the re- source, the capital element to be set aside has to be larger In this chapter, receipts from the sales of a depletable (and the income content smaller) to make it possible to natural resource are net of extraction cost. The extraction maintain a constant income stream in real terms. The cost contains elements that do not directly generate value converse is true if there is reason to believe that the added, such as materials used up in the process of extrac- resource would appreciate relative to the goods and serv- tion, but would normally also contain payrnents to factors ices that would make up future income. But these are of production, which should be included in GDP in the refinements that could be incorporated in the method usual way. suggested and would not affect much the results obtained. A time series of expected net receipts iR from the sale The method proposed, with the implicit assumption of of a resource that, as a result of exploitation, will come constant relative prices, seems adequate if the direction to an end in a future year n contains a lrue income in which relative prices will change is uncertain. element X, where X < R, such that if R -- X (the capital Notes content) is invested year after year at interest rate r, the wouldcontinueto yieldthe same investment accumulated levelato incomes t d 1. The term "DutchDisease" originatedin the 1960sto refer isnecoessar leveltof X. idntfyXR,thtis te rpotin to the adverseeffects on Dutch manufacturing of natural gas t is necessary to identify XIR, that is, the. proportion discoveries.Generally speaking,increasedrevenuesfrom a nat- of net receipts that can truly be called income, and its ural resource encouragesspending on nontraded goods and complement 1 - XIR, the capital element, also as a drawsresourcesout of the traded, nonnaturalresourcesector, proportion of net receipts. The capitalized value at inter- and retardingdevelopment thus stiflingdiversification of non- est rate r of the finite series of receipts R should equal naturalresourceexports.See, for example, Corden (1984). the capitalized value at the same interest rate of the 2. See Hicks(1946),p. 172. See also Keynes(1936),chapter 18 SalahEl Serafy 6, on "The Definition of Income,Savingand Investment," and but this should not inhibit approximations that can be later that chapter's"Appendix on UserCost." revised.In the words of the late Sir Dennis Robertson,"it is 3. OPEC admittedlymet regularlyto agree on the prices at betterto be approximately rightthan preciselywrong!" whichits memberswouldsell oil. But such prices clearedthe marketwithout any quotasimposedto regulate supply. Not until References 1982, however, did OPEC behave like a cartel, with individual quotasindicated for its members,but likeall cartelsthis attempt Corden, W. M. 1984. "BoomingSector and Dutch Disease to maintainpricesin a decliningmarketpalpably failed. Economics:Survey and Consolidation." Oxford Economic 4. See Solow(1974),in whichhe recalledHotelling's path- Papers36:359-80. breakingarticle, "The Economicsof ExhaustibleResources," El Serafy,Salah.1979. "The OilPrice Revolution of 1973-74." Journalof PoliticalEconomy39 (April1931):137-75. Journalof Energyand Development 4(2, Spring):273-90. 5. "[T]heoriginaland indestructible powersof the soil" as 1 formulated by Ricardo(1821). . 1981. "AbsorptiveCapacity,the Demandfor Revenue, 6. 1had been thinkingalong these linesfor some timeand and the Supplyof Petroleum." Journalof Energyand Devel- first expressedmy viewson this topic in a paper deliveredin opment 7(1,Autumn):73-88. March 1979 to the staff of the OAPEC in Kuwait (El Serafy Hicks,J. R. 1946. Valueand Capital.2nd ed. Oxford:Oxford 1979). I elaborated these viewsand proposed a method for University Press. estimatingincomefrom depletablenaturalresourcesin a later . 1981. Wealthand Welfare:CollectedEssays on Eco- paper on absorptivecapacity,presentedin 1980 to an energy nomic Theory.Cambridge, Mass.:HarvardUniversity Press. conferenceorganizedby the University of Colorado.The con- Keynes,John Maynard.1936. The GeneralTheoryof Employ- cern at the time wasthat the so-called"capitalsurplus"econo- ment,Interest,andMoney.London:Macmillan. mies, which exported petroleum,had too low an absorptive Marshall,Alfred.1920. Principlesof Economics.8th ed. Lon- capacity.It was felt that if that could be increased,it would, don:Macmillan. throughincreasedimports,restoreequilibrium to the petroleum donMacil. buyers'balancesof payments.I attackedthis approachbecause Ricardo,David.1821. On the Principles of PoliticalEconomy it reflectedthe short-terminterestsof petroleumconsumers and and Taxation.3rd ed. London:John Murray. not that of the ownersof this scarceresourceand of humanity Smith,Adam.1937. An InquiryInto the Nature and Causesof at large. See El Serafy (1981). An appendix to that paper the Wealth ofNations, 1776.Cannan Edition.NewYork:The entitled, "HowMuchof PetroleumReceiptsCan Be Reckoned ModernLibrary. to Income?"proposedthe formulashownin the appendixto Solow,Robert M. 1974. "The Economics of Resourcesor the this chapter. Resources of Economics."AmericanEconomicReview64(2, 7. Occasionally estimatingreserveswouldraisecontroversy, May):1-14. __ _ __ _ _ 4 NaturalCapital Introducing into the SNA Anne Harrison Duringthe past ten to fifteen years public reaction to the "desirables"that the SNA omits and excludes the environmental issueshas broadenedfrom a concern for "undesirables" that the SNA includes. preservingendangeredwildlife and aestheticallypleasing Such alternativestatisticalsystemscould form satellite landscapesto the realizationthat the wholeprocess of accountsto be used in conjunctionwith the revisedSNA. economicdevelopment dependson the utilizationof nat- To the extent that such systemsare greater elaborations ural resources.In extremecases,such as in Sub-Saharan of specificdetail and rearrangementsof existing items Africa,the physicaland economicsurvivalof millionsof and inclusionof others, no conflict should arise. How- people dependscriticallyon the management of both the ever,giventhe claimof the SNA to providea comprehen- quantityand qualityof land and waterresources. sive framework under which all such satellite accounts When environmental economistswish tc demonstrate can be developed,it is importantto establish an appro- their concernin quantitativeterms and to illustratethe priate interfacewithenvironmental matters in the process effectof alternative scenarios,they find the present Sys- of reviewing the SNA. tem of NationalAccounts (sNA) (United Nal:ions 1968) to From an environmental perspective,neither exhausti- be inadequate for a number of reasons.The problemsare ble resources such as mineral deposits nor permanent both of omissionand commission.On the one hand, resourcessuch as land and water should be treated as manyactivities undertakenbywomenin developing coun- freegiftsof nature. Although land and water seem at first tries, such as findingand carryingwater amdfuelwood, to be free, these resources are not automaticallyself- are excludedfromthe presentmeasuresof grossdomestic renewing,and although humanity may have power to product (GDP). On the other hand, majc,rprojects to renewthem,it has a muchgreater powerto destroythem. rehabilitatepollutedriversor otherwiserestore degraded Economicactivitynecessarilyinteracts with nature, and environmentalresources are included in GDP, and in- allowance mustbe madefor the existenceof environmen- creasesin this typeof activity lead to increasesin GDP. tal programs,whichhusband and maintainthese penna- Steps to redress some of these shortcomingsare in nent resources,and for the lack of such programs,which hand. Variousspecializedstatistical systemshave been, leads to the destructionof natural resources. or are being, developed to addressquestionsin specific The presenceor absenceof such programsis therefore areas, and the environment is no exception.Physical re- an economicdecisionthat directly affects the potential source accountsare being developed to show,in volume economicactivityin subsequentperiods, just as a deci- terms, inputsand outputsof physicalprocesses,including sion on the rate of depletionof nonrenewable resources natural resourcesas wellas manufactured 'products.The does. In both cases, therefore, there is a strict parallel "Framework for the Development of Environmental Sta- with the decisionto create and maintainman-made capi- tistics" (UnitedNations 1984), for example,attemptsto tal, and environmentalistsargue that the SNA should rec- showthe interactionamongenvironmental, economic, and ord these resources as alternativeforms of capital.The social statistics. Various proposals have beern,and are question,therefore,is howmuchpresent practicesunder being, examinedto developan aggregatethat includes the SNA wouldchange if these resourceswere treated as 19 20 Anne Harrison natural capital. The main purpose of this chapter is to absorb the operatingloss, and on the balance sheet the answerthis question. valueof the reserveswouldbe givenas zero. Morecomplicated alternative for mineralex- valuations traction have been proposed. For example, El Serafy ExploitableResources (Chapter3) suggestsdeterminingan income streamwith the use of a discountedcash flow analysisof expected Muchof the past discussion byresourceeconomists has earningsfromthe depositover its expectedlifetime. concernedthe treatmentof nonrenewable resources,such as mineraldeposits.In fact, similarargumentsalso apply Permanent Resources to natural forests used for timber and to natural fish stocks. Since both of these are renewable,even if not Anothertypeof expenditureof concernto environmen- actuallyrenewedon a realistictime scale,it is convenient talists is related to the preservationof land, water, and. to considerall three cases as exploitable resources. clear air. This is generallydescribedas defensive expen- In the production accounts of the present SNA, when diture, althoughfurther categorization is instructive,and an exploitable resourcesuch as oil is extractedand sold, incomeas wellas expenditureneedsto be considered.In onlythe directcosts associated withits extraction,includ- contrast to the exploitableresources discussed above, ing labor, are deducted from its market value, and the these resources will be referred to as permanent re- wholeof the difference is treated as gross operatingsur- sources. plus. Net operating surplusdiffersfrom this only to the Beforeconsideringhow to deal with issues related to extent that fixed man-made capital is consumed. Al- permanentresources,it is helpfulto review the SNA guide- though the processof oil extractionis treated as produc- lineson the treatmentof man-madecapital.Two typesof tion, neither the value of newlydiscovered reserves nor expendituresassociatedwith capital occur on a yearly changes in the value of reservesbecause of changes in basis.The firstis the consumption of fixedcapital(depre- worldprices is treated as production. ciation),whichis an allowance to permitthe replacement This results in the rather anomalouspresentationof of the capital asset at the end of its usefullife. Overthe infdrmationabout stocks. The value of the unexploited economy as a wholethe valueof the consumption of fixed oil at the start of the year appears in a balancesheet for capitalin a year is the valueof all man-madeassets that the industryand the nation, as do the start-of-year values were used up in that year and that haveto be replacedif of man-made capitalassets, but, since all changesto the the level of man-madecapital stock at the start of the valueof exploitable resourcesbetween the start and end yearis to be kept intact.The second is the currentexpen- of the year are explainedin the reconciliation account, diture necessary to repair and maintainthe capitalstock. this occurrencein the balance sheet is like a memoran- The SNA distinguishesbetween current and capital re- dum item. If exploitable resourcesweretreated as natural pairs: "expenditureson current repair and maintenance capital, part of what is now treated as gross operating make good breakagesin fixed assets and keep them in surplusin the productionaccount wouldappear as con- properworkingorder, whileoutlayson capital repair and sumptionof natural capital, and net operating surplus alterationlengthenthe expectednormallifetimeof use ol would be decreasedby this amount. A matchingentry fixed assets or increase the productivityof these good wouldappear in the balance sheet of natural capital as- significantly" (para. 6.123). sets. This distinctionmay be blurred in practice, however. The question arises of what value is appropriate to Althoughcurrent maintenancemay not directly extend attach to the exploitableresourcebefore its exploitation. the life of an asset, the lack of maintenancemayshorten Daly(Chapter2) and others suggestthat, in additionto it, and, in practice, estimates of the lifetime of assets the direct cost of extraction,an entrepreneurialreturn assume regular maintenance.There is thus a relation (calculated perhaps as a standard markup on the direct between the levels of current maintenance and capital costs) should also be deductedfrom the valueof the oil consumption.Indeed,for a specificgroup of assets, in- at the wellhead and that the residualwouldrepresentthe cludingroads and dams,the SNA states: "it may be con- subsoilvalue. This straightforward approachhas the ap- sideredthat expenditures on repairsand maintenance are peal of simplicity and economic sense. Variationsin world sufficient to maintainthe asset in its originalcondition" priceswouldlead to matchingvariations in subsoilvalues (para. 7.20);this is consideredas justification for making and would determinewhen a deposit was commercially no provision for consumptionof these fixed assets. This viableand when not; the latter being when the subsoil provision has alreadybeen questionedin the SNA revision valuefell to zero or below.In certain circumstances ex- process,and it is likely to be changed in the new SNA ploitationmightcontinueevenif this valuewerenegative, manual.' forexample, becausethe directcostscouldnot be averted. In severalpoorerdeveloping countries,for example,the In such a case, the entrepreneurial return wouldhaveto retrenchmentof government expenditurehas led to the Introducing NaturalCapitalinto the SNA 21 neglectof road maintenance. Eventually new capitalpro- does not make the case either for suppressingGDP as a jects have been necessaryto replace roads, and these measureof all economicactivityregardlessof desirability involve capitalexpenditurethat wouldnot haveoccurred or for changingthe accountingbasis for discriminating if there had been adequatecurrent maintenance. Thus it betweenintermediate and finalexpenditure. is suggestedthat if maintenanceis not adequateto keep Eventhe alternative presentedhere-that whenpreven- roads in their original condition, then the capital con- tive expenditureis undertakenby industryor by govern- sumptionof these assets should be estimated.Although ment on a charge-back basis,it is intermediateexpendi- not yet discussedin detail, the appropriatevalueof the ture-is oversimplified and misleading.The preventive capitalconsumption would seem to be that of the "miss- expenditure consistsof the purchaseof labor and of goods ing" maintenance. and services,whichin turn have labor input. Therefore Howdo these practicalities carry over to the proposal initiatinga preventive expenditure programdoes increase to treat naturalresources as capitalassets?Expenditures the valueadded,and thus GDP, evenif it is first recorded associatedwith permanent resources can be of two re- in the accountsas intermediateexpenditure.Indeed,the lated, but rather different,types. The first are expendi- fact that increasingpollutionpreventionwould increase tures intendedto preventthe degradationof natural re- employment opportunitiesis often cited by environmen- sources,and the second are to redress degradationthat talistsas an argumentfor initiating such programs. Under has alreadyoccurred.Preventive expenditureclearlypar- the present SNA, all alternativeslead to the conclusion allelscurrent maintenanceand, in particular,the current that initiatinga pollutionpreventioncampaign, however maintenance of roads. If all industriesensure that land, funded,increasesGDP. air, and water are not degraded,these natural resources It is suggestedhere, however, that no such apparent remain in their original condition,and Ihe preventive increase in GDP should be shown.The consequenceof expenditureis clearlycurrent. treating natural resourcesas capital assets is that degra- Basically,such preventive expenditures maybe madein dation of those natural assets is treated as capital con- one of three ways:by industryitself(eithervoluntarily or sumptionand shouldbe includedin GDP. This treatment in response to governmentlegislation),by government would exactlyparallelthe present situationof the treat- and funded by taxes leviedon industryaccordingto its ment of roads describedabove.The newSNA proposalis pollutionpotential,or by government and fundedby gen- that GDP should include either the cost of maintaining eral revenue.In the first case, expenditures by industry roads in their original conditionor the consumptionof to preventpollutionwould be classifiedas intermediate man-made capital of the same amount.This recognizes expenditures.In the second case, since the paymentto that the present practice, in whichthere is no mainte- government is relatedto the serviceprovided,this activity nance, leads to GDP being understatedby the amountof of government should be treated as a public enterprise. this missingcapital consumption.For the environment, Paymentsto government should not be treated as taxes, therefore,it is proposedthat if preventive expenditureis but as feesforservices,and thus shouldalso be classified incurredand no pollutionresults,GDP is correctlymeas- as intermediateinputs. (Government provisionof waste ured. But ifsuch programsare neededbecausepollution disposalservicesto industryis alreadytrealtedas a public is increasing, but theyare not being initiated,then GDP is enterprise in some countries.)In the third case, when underestimated by the cost of the programs. A simple government funds pollutioncontrol out of general reve- numericalexampleof the alternatives is given in Table nue, this appears as a final expenditure. 4-1. Thisillustratesthe casein whicha countryat present Someresource economists argue that all such preven- has a GDP of 100 with consumption of man-made capital tive expenditureshouldbe excludedfrom GDPand there- of 10.The effectof environmental degradationis 5, which forewishto categorizeevengovernment-funded programs as intermediate expenditure, but this proposalis inconsis- tent with accounting definitions. The distinctionbetween Table4-1. Effect on GDPof Introducing intermediate and final expenditure is determined by ProtectionProgram an Environmental whetherthe product is resoldto anotherec:onomic agent, aPreent SNA revision Proposed not by the nature of the product. For welfareor other Without With Without With analyses,specificactivitiesmay be excludedbecause of program program program program their nature. In addition to environmentalprotection GDP 100 105 105 105 costs,such candidatesas defenseexpenditures and crime of Consumption and drug "industries"have been put forwardfor exclu- man-madecapital 10 10 10 10 sion. The derivationof an alternative measure of a re- of Consumption stricted set of activitiesby deductingfrom (and possibly naturalcapital - - 5 0 addingto) those includedin GDPusingnormative criteria NDP 90 95 90 95 is a legitimateand arguablydesirabledevelopment. But it - Not applicable. 22 Anne Harrison is exactlyredressedby introducing an environmental pro- levelbased on differentlifetimeassumptions for different tectionprogram. types of assets in differentindustries.For the consump- This highlysimplifiedexample highlightsthe conse- tion of natural capitalsuch an approachis neither possi- quencesof the proposedtreatment and of preserving the ble nor appropriate.Industryis not the only degrader of existingpositionon natural capital.Netproductmeasures the environment,and it may be impossibleto attribute are the same in both systems, whichshows that the intro- the degradationto individual industries. ductionof an environmental protectionprogramleads to Consider,for example,the case of three factories, all an increase in NDP. Under the present SNA there is an discharging effluentinto the same river.It is possiblethat increaseof equalsize in GDP, whereasunder the proposal the river couldabsorb the effluent fromany one but not described here there is none. But this is achievedby all three or that the combinationof differenteffluents increasingthe present valuationof GDP without the pro- causedthe problem.In such casesattributionof the cause gram to allowfor the consumption of natural capital. of the pollutionamongthe three factorieswouldbe diffi- At first it may seem counterintuitive that the degrada- cult and not especially instructive.Degradationmayalso tion of permanentresourcesleads to an increasein GDP. be caused by final consumers,for example,by the car This reflects the common lack of awarenessthat the exhaust of households or government. It may also occur "gross"in GDP means "before allowance has been made not as a result of activitywithinthe country,but as an for consumptionof capital." Commonusage overlooks involuntary import from a neighboringone. For all these this part of the definitionor assumesthat the allowance reasons,therefore,it seems appropriatethat a single ad- for depreciation is fairlyconstant overtime, so gross and justment in moneyterms to the SNA definitionof gross net product measuresmovein line with one another,and productmeasureswouldbe adequate.This mightbe seen gross can be used as a proxy for net without undue as analogous to the adjustment for imputedbankingserv- distortion. This assumptionhas proved misleadingfor ices, which is made in total only and not attributed to manypoorercountrieswherenew capitalis not acquired individual industries. as fast as the old is exhausted.In environmental terms For the national accountsfor a year, it is the changes the assumption is equivalentto assuming that the environ- during that year in the environmental endowmentsthat ment is not degraded,and it is the obviousrefutationof need to be captured,not the deviationfrom an absolute this that is the originof the presentconcern.An objective state of perfection, and these annual changes can be of the present reviewof the SNA must be to ensure not measured,for example,by air and water qualityindexes. only that GDP and NDP are properlymeasured,but also The cost of making improvementscould then be esti- that the conceptsare clearlyexplainedto facilitate better- mated. Althoughthe measurementand valuationof the informed and more appropriatecommentary and analysis. consumption of natural capital may have to be approxi- An importantuse of GDP is for comparisonsovertime matedand simplified, these inexactitudes may be no less or betweencountries.Althoughthere maybe reluctance tolerablethan those alreadyencounteredin such areas as to increasepast estimatesof GDP to allow for the con- the ownershipof dwellings, the valuationof subsistence sumptionof natural capital,the alternativeis also disturb- output, and the derivationof holdinggains and losseson ing. Withoutthis revision,countriesintroducingenviron- intangibleassets. mental protectionprogramswill show increasesin both GDP and NDP. The worse the environmental degradation Environmental Enhancement Programs that is being reversed,the greater this increasewillbe. Underthe proposalabove,onlyNDP willincrease,and the In this discussionit has been assumedthat there is a gap betweengross and net product willnarrow,in accor- prima facie case for includingadjustmentsfor the con- dance with both the economicand accountinginterpre- sumptionof natural capital in all countries,althoughfor tation of gross and net. The entries for this capital con- some countrieswhereno environmental degradationoc- sumptionas wellas for man-madecapitalwould also be curs the appropriateadjustment may be zero. Another includedin the balancesheet and wouldshowthe cumu- factor to consider,although it may apply irregularly and lativeeffect on the resources availableto the nation of to only a few countries,is how to treat major programs continued environmental degradationor of its restitution. to reverse the degradationthat has already occurred. Such programs are most likelyto be funded by govern- Valuation of the Consumption of Natural Capital ment,but there is no reason in principlewhytheyshould not be fundedby industryor by private nonprofitinstitu- Assumingthat the theoretical proposal above is ac- tions. Whoeverundertakes the expenditure, it clearly cepted, there remainsthe question of howconsumption wouldenhance the natural resourcesand would increase of natural capital should be measured.Consumption of the availabilityof such assets in the future. This under- man-madecapital,althoughnot without its owndifficul- linesthe case for treating the assets as capital and the ties of measurement, can be calculatedat a disaggregated expenditure as capitalexpenditure. Introducing Natural Capital into the SNA 23 Treatingenvironmental enhancementprogramsas cap- ernmentprograms,eveniftreated as currentexpenditure, ital expenditureis a logicalconsequenceof introducing will at present lead to increasesin GDP but willnot be the consumption of natural capital as an adjustmentbe- separatelyidentifiable. The proposalbeing made here is tweengross and net product measures,since they are in that majorenvironmental rehabilitationprogramsshould effectnegativecapitalconsumption. It was argued above be classifiedas capitalexpenditureand identifiedas en- that the measurement of natural capital consumption hancementof natural resources,regardlessof who funds should be based on annual changesin qualityindexesof them. In supplementary analysesa more limitedclass of environmental endowments.If such an index showsan capitalexpenditure,includingonly "productive"capital, improvement over the year, the value of natural capital however defined,maybe used, parallelingthe derivation consumption for that resource is zero, but the valueof of the more restrictedmeasuresof "desirable"activities the improvement, whichis by our definitionthe valueof describedin the discussion of preventive expenditure. the enhancementprogram,should enter the azcountsas the same broad type of expenditure,that is, as capital Unplanned Occurrences rather than current. Some misattributionof capital ex- penditure may go undetected if the program does not The sections above dealt with current and capital ex- make a positiveimprovement but only mitigal:es the de- penditures in relation to the environmentand in the gree ofdegradation in the environment. If the data sources contextof plannedactivities.The environmentand sub- were rich enough, adjustments for these situationscould sequent economicactivity,however,are also greatly af- be made, and separate adjustmentscould be made for fectedby a natural disaster,such as an earthquake,or a differenttypes of naturalresources.Sincethe proposalis man-madedisaster, such as a major chemicalspillage. to adjust for the consumption of, and enhancements to, The proposalsdescribedabove could encompassthe ef- natural resourcesat the nationallevel,however, aggrega- fect of such unplanned occurrences.A disaster would tion of the effectsacross projectsand resourcetypeswill cause consumption of natural capitalto increaseand net still ensureconsistency in the flowaccountsand balance product measuresto fall.This wouldbe offsetin part by sheets at the nationallevel. anysignificant expenditure to restorethe situation,which It may be argued that natural resources are not in wouldcount as enhancementof natural capitalfromwhat themselveseconomically productiveassets and therefore it wasafter the disaster.The same is true of the effecton that expenditureto enhance them should not be treated naturalresourcesin one countryof degradation(planned as capital. However, not all items includedin gross do- or unplanned)originating in another country. mesticfixedcapitalformation(GDFCF) in the presentSNA are economically productive. Schools and universities Sustainability and the SNA produce better educated people, but they will be more productiveonly if employment opportunities exist that Apartfrom the intrinsicinformation to be containedin utilizethe extra educationgained. It is not unknownfor environmental accounts, there are two further benefits such institutionssimplyto increasethe number of edu- that this initiativehas brought to national accounting. cated unemployed, althoughthe GDFCF is not decreased The first has been to focusattention on the difference to reflect this. Nor shouldit be. Schoolsand universities between net and grossproductmeasures, since evenwhen are means of improvingthe human capital stock. The the distinction relatesonlyto man-made capital,there are deployment of that capitalis a separateissue.Someman- numerousoccasions whennationalincomeon a net basis made capital assets are purely defensive,such as the wouldbe a more appropriateindicatorthan the ubiqui- Thamesbarrage, a mechanicalbarrier across the River tous GDP. The other benefit is more diffusebut arguably Thamesto hold back waterduringhigh tide and adverse more importantin the longer term. The present SNA has windsto preventLondonfrom beingflooded.Somne serve depersonalizedeconomicsby concentratingon produc- obviously noneconomic functions,such as a new cathe- tion processesand associatedtechnologies. Environmen- dral or a spy satellite.The range of assetsto be included talistshavebroughtattentionback to the questionof how in GDFCF in the new SNA is due to be reviewed,and a peoplelive and the qualityof life,whichis associated with distinctionin classification betweenproductiveand non- an understanding that respect for life is intimatelyand productiveassets might be very desirable.But even on inevitably bound up with respect for the environment. In presentgroundsa case can be made to treat majorenvi- statisticalterms this gives a new opportunityto bridge ronmentalenhancementprogramsas capitalformation. the presentseparationbetweeneconomicand social sta- Thesesorts of programsare not mentionedin the pres- tistics by articulating the interaction between environ- ent SNA. It is difficultto be categoricalabout present mentaldevelopment and humandevelopment throughthe practice, but it seems that the implicitrecornmendation economicproduction process. It is this integration of in the SNA to treat such expenditureas current is gener- natural, man-made,and human resources that provides allyfollowed. In line with the discussionabove,such gov- the framework for definingsustainabledevelopment. 24 Anne Harrison Environmental economists are still workingto agreeon ural capital.Suchmeasurescouldalsobe appliedin areas a definitionof sustainable income.But centralto it is the of humancapitalby measuring,for example,the ratio of point, recognizedby Hicks,that if assets are consumed the number of trained doctors in the country at the end withoutbeing replaced,one is worseoffat the end of the of a period to the numberat the start. Further variations period than at the start, and that consumptionin the on the basic ratio are also possible.For long-termplan- period coversnot just income but also an element of ning, periods longer than a yearmightbe used; in other wealth. cases assets per head of populationmightbe the basisof The presentSNA containsthree measuresof GDP-from the ratio. the income,output, and expendituresides-all of which Not only would the adoption of a set of sustainability are identicalin value. It may be possibleto detennine factorsthat can be calculatedeasilyand withoutambigu- measuresof sustainableincome and sustainableoutput ity form a bridgebetweenthe main SNA and the satellite that are equalin the aggregatebut not in their disaggre- environmental accounts,theywouldhighlightdirectlythe gatedparts. For example,ifincomefroma miningactivity difference in valueand interpretationof measuresof gross is used to fund alternativeproductiveactivitywhen the and net product. Provisionof, and referenceto, a set of mineralresourcesare exhausted,the output frommining such factors can only help to spread the understanding is not sustainableeven if total output and total income of the conceptsof the nationalaccountsand raise discus- are. But there is no necessityfor the income in a later sion in the popular mediato a more informed plane. This period to be at exactlythe same levelas in the previous consequence wouldbenefitboth nationalaccountantsand period.Which levelof incomeis to be used as the basis environmentalists and wouldbe an importantstep on the of sustainableincome?Is it the sustainability of income road to the introductionand acceptanceof more elabo- or incomeper headthat is of interest?Is sustainability an rate conceptsof sustainableincomeand product. absoluteor a relativeconcept? The answerto these questionsmust dependin part on Summary of Recommendations the needs of analysts.It may wellvaryfrom one applica- tion to another and may depend on assumptionsabout If satelliteaccountsfor the environment are to comple- future technological change and other subjective predic- ment the sNA, the basic accountingconventionsin the tions. Giventhis uncertainty, such work seemsat present two systemsmust agree. In particular, the distinction a candidateforsatelliteaccountsrather than total integra- betweenfinal and intermediateexpenditureand the ex- tion with the SNA. However, a substantiallink could be tent of capitalconsumption that is the differencebetween establishedby adopting "sustainabilityfactors." These gross and net domesticproduct must be agreedon if the factorswould be nothing more than the ratio of capital two systemsare to be harmonized.The proposalsmade stock at the end of the period to capital stock at the in this chapter to reach this harmonizationimply the beginning, adjusted for price change when necessary. following changesfor the SNA. Hicks'sdefinitionof income-"what you can consumein the period and be as welloff at the end as at the begin- a. It wouldbe necessaryto introduce a balance sheet ning"-is equivalent to sayingthat new capitalmustbe at for natural resources. least as great as capitalconsumedduringthe yearso that b. Part of what is at presenttreated as gross operating the capitalstock at the end is at least as great as at the surplusfor exploitable resourceswouldbe treated as con- start. In this case a sustainability factor would have a sumptionof natural capitaland would appear as such in valueof one or greater.A valueless than one implies that the productionaccount. too much capital has been consumedand that the con- c. An adjustment for the consumptionof natural capi- sumptionlevelis not sustainableindefinitely. tal wouldbe calculated and appliedas a singleadjustment Despitethe simplicity of the definition, this conceptof of the economyas a whole. a sustainability factor has severaladvantages.It can be d. Both of the adjustmentsin b and c would be de- applied at detailed levels as well as in the aggregate. ductedfrom net product measuresas nowdefined. Sustainability factorsfor man-made capital could be dis- e. Projects designed to enhance environmental re- aggregated by assetand industry, and, evenat the detailed sourcessignificantly wouldbe classified as natural capital micro or project level,sustainability factors for environ- formation. This attributionwouldbe appropriatewhether mentalresourcescould be calculatedseparatelyfor vari- the expenditure was undertakenby government or indus- ous categoriesof land, for water, and for air. Further, try. since the factors are independentof price effects,they f. The estimatesof consumption of natural capitalfrom can be basedon the same sort of quantifiedinformation b and c and for enhancementof natural capital from e used to calculatethe consumptionof natural capital as wouldboth carry overto the balancesheet. proposed above. Indeed their compilationwould be a g. Sustainability factorsshouldbe introducedthat show logicalstep in derivingestimatesof consumption of nat- for all capital-man-made,natural, and human-the ratio NaturalCapitalinto the SNA Introducing 25 of stock at the end of the period to that at the begiining. specifictopic and attended by experts from both developing This would help develop more comprehensive measures and developed of the international countriesand representatives of sustainable income in the longer term and to empha- organizationsconcerned and publishing withcollating economic size the practicality and desirability of using net rather statistics. than gross product measures where this is appropriate. References Note UnitedNations.1968. "A Systemof NationalAccounts." Publi- 1. The presentSNA was publishedin 1968 and is IIowin the cation E.69.XVII.3. NewYork. course of review, which started in the early 1980s and is ex- . 1984. A Frameworkfor the Development of Environ- pectedto lead to a revisedversionin 1991. The review process ment Statistics. StatisticalPapers, Series M, no. 78. New consistsof a series of three or four meetingsa year,each on a York. _ ~~~~~~~~5 Measuring uithin theFramework Pollution of theNational Accounts Derek W Blades The nationalaccounts could make a usefulcontribution To date onlyone attempt has been made to applysuch to environment statisticsin the importantarea of meas- a model. This was developedby Victor (1972) for the uring certain aspectsof pollution.Pollutionis taklento Canadianeconomyand has been used to determinethe mean the disposalof waste solids, liquids,gases, heat, output of pollutantsassociated with one dollar'sworth of and noisein waysthat harm people or reducetheir enjoy- final demandfor variouscommodities. The data require- ment of theirsurroundings.It is helpfulto distinguishtwo ments for matrixesB and C are clearlyveryheavy,partic- sides of pollution:the act of polluting, such as by dis- ularly since they involveinformationthat is not usually charge of noxiousgases or fluids into the environment, collectedin industrialsurveys.In addition,however, there and the abatementof pollution,whichcoversgovernment are at least two other reasonswhyrelativelylittle interest monitoringof pollutionlevelsas wellas measurestalken has so far been shownin this approach. by industryand households to reduce the output of pol- First,matrixes B and C containvariousunits of volume, lutants.This discussioncoverstwo aspectsof the act of suchas gallonsof wateror cubicfeet of nitrogenin matrix polluting(the output of pollutantsand pollutiondamage) B and millicuries of cesiumor tons of sulfur dioxidein and two aspectsof the abatementof pollution(the costs matrixC. Thus the entries cannot be aggregatedto pro- and the benefitsof pollutionabatement). duce meaningfultotals, and the relative importance of variousinputs and outputs can be measuredonly in an The Outputof Pollutants arbitraryfashion.The second problem concerns the op- erationalvalueof the model.The kind of data that poli- Since pollutantsmay be regarded as a particular (uin- cymakersneed about the output of pollutantsis highly wanted) type of industrial output, it seems natural to site-specific.The informationthat the pulp and paper studythe generationof pollutantsby an extensionof the industryuses x gallons of water and emits y tons of conventional input-output table. Table 5-1 summarizes a chlorineis not in itselfvery helpful.Such data have op- model proposed by Ayres and Kneese (1969), which erational significance only when they can be related to showsthe overalleffectof economicactivityon the envi- informationabout the particular sites where pulp and ronment. It is based on the materialsbalance principle: paper millsare located.In short, matrixesB and C are of goods that are taken out of the environmentcirculate limitedinterestfor most policypurposesbecausethe data through the production-consumptioncycleand are re- they contain are too generalizedto be applied to local turned to the environmentin a changed,but not dimin- problems. ished,form. MatrixA is a conventional input-output table displaying Pollution Damage the commodity composition of intermediateconsumption by industries. MatrixB shows the amounts of various Pollutioncauses damages, such as sickness and pre- natural resources used in production, including "free" mature death, stuntedgrowthof crops, disappearanceof resources such as air and water. Matrix C shows the or corrosion wildlife, of metalsand masonry. The national amountsof wasteproductseventually discharged into the accountsreflectsome of the costs of some of these dam- environment. ages in, for example,increased health expendituresby 26 Pollution Measuring of the NationalAccounts withinthe Framework 27 Table 5-1. The Effect of Economic Activitf on the Environment Final Wastedischarged Industries demands Total to the environment Commondities A C Primary inputs _ _ Total Environmental commodities B _ i households or government, lower labor productivity, In a study by the United KingdomAtomic Energy Au- highercosts of foodproduction,and increasedoutlaysfor thority (1971) the costs of air pollutionwere deemed to repairing and maintainingbuildings,but they are not include, in addition to medicalexpenses, the value of explicitlyshownas costs of pollutiondamage.Wlould it production lost through illness and death, the loss of be possibleto do so? Table 5-2 showsan input-output imputedincomeof housewives and students,and the so- table that could serve as a framework for showing explic- cialcostsof prematuredeath and illness.The socialcosts, itly some of the costs of pollution damage that are in- whichwereby far the largestpart of the total, werebased cludedin the national accountsbut hiddenat present. on a valueof £1,000 for each year of life lost and on the The columnsheaded DC indicatecosts frornpollution ranges of legal compensationawardedfor sickness.The damage. ColumnsA and B are intermediate costs in- valuationprocedures used for these various costs are curredby industryin, for example,cleaningpollutedwa- often very arbitraryand subjectto great uncertainty. Just ter forhuman consumption or industrialuse and protect- howuncertainmaybe judged from the results of studies ing buildingsand equipmentfrom atmospheric pollution. on the costs of air pollution in the United States pub- ColumnC would includethe costs of repairs to govern- lishedannuallyby the Councilon Environmental Quality. mentbuildingsbecauseof air pollutionand-a largeitem For 1968, estimatesof the cost of air pollutiondamage in many countries-the costs of medicalservices con- ranged from $8.1 billionto $20.2 billion,and for 1970 nected with pollution-linked diseases.Householdexpen- from $7.0 billionto $12.3billion.Saunders(1977, p. 51) ditures on these medical services would be shown in observedthat "the range of uncertaintysurroundingsuch columnD, whichwouldalso includesuch cosis as insula- estimatesis enormous.It maybe suggestedby the skep- tion to protect houses from traffic noise, air-filtering tics that the usefulness of such figures. .. is in the sphere equipment,and water filters to removechemicalsfrom of publicrelationsrather than of socialscience." drinkingwater. The costs discussedabove in connectionwith Table Finally,columnE includescapitaloutlaysby producers 5-2 are less open to criticism on these grounds, since and governmentin connection with pollutiondamage. . they are alreadyincludedin the national accounts;they These would includepart of the cost of replacingbuild- only need to be separatelyidentified.Whilethe difficul- ings and equipmentwhoseliveshavebeen shortenedby ties of doing this should not be minimized(often the pollution. costs of pollution-related damagecannot be easilydistin- ColumnsA through E containonly a smallpart of the guished from the costs of normalwear and tear), it seems total cost that could be attributed to polluticn damage. worthwhile to try to identifysome of the major costs of Table 5-2. Input-Output Table Isolating PollutionDamage Costs P Grossfixed Prodlucers ...__- Government Private I capital 1 2 Total consumption consumption formation Stocks Exports Totals Other DC DC Other -F DC Other DC Other DC Other Commodities 1 A BC D E 2 Total __ Indirect taxes .__._ Factor incomes Restof world _ Note:DC = pollutiondamagecosts. 28 Derek W Blades pollutiondamage.These mightinclude,for example,the emient expenditures. The UnitedNations"Classification respiratorydiseasesfor costs of treating pollution-linked of the Functionsof Government" (COFOG) identifiesout- persons livingin large towns and the estimatedcosts of layson both monitoringand abatement.Data on pollu- protecting buildings and machineryfrom atmospheric tion abatement expendituresby households, mainly in pollution. connectionwith vehiclesand home heating, are usually obtainedfromproducersrather than directlyfrom house- Costs of Pollution Abatement holds. There are some conceptualproblemsin defining abatementexpenditures by households that also applyto The third aspectof pollutionto be consideredconcerns expendituresby industries. These problemsare consid- the costs borne by industries,and to a lesser extentlby ered below. government and households, to reduce the output of pol- To date the most rigorous, or at least the best-docu- lutants. Elsewherein this volume,these costs are de- mented,effortsto compilestatisticson "pollutionabate- scribedas "defensive expenditures."The columns headed ment and control expenditures"(PACE)by industryhave PA in Table 5-3 show where these costs are currently been made in the UnitedStates by the Bureau of Eco- includedin the national accounts,althoughthey are not nomic Analysis. The problemshave been discussedby nowdistinguished separately. Cremeans(1974 and 1977). Columns A and B showpurchasesof intermediate and First, there is what has been describedas the baseline primaryinputsfor pollutionabatement.These represent problem.This is the difficulty of establishing a baseline the current operatingcosts incurred by industryfor this fromwhichto measurethe extent of pollutionabatement purpose.ColumnC showsgovernment spendingfor pol- activities. Longbeforethe environment becamea fashion- lution abatement,mainlyin connectionwith monitoring able topic,producers,households, and governments were pollutionlevels.Householdpurchasesof goods,such as controlling pollutionto some extent. Shouldantipollution catalyticconvertersto reduce emissionsof noxiousex- activities be measuredfrom a zero baseline,so that they haust gasesfromvehiclesor less-polluting equipment and covertraditionalas wellas newerabatementprocedures, suppliesfor home heating, are shownin columnD. Fi- or shouldthe baselinebe brought forwardto includeonly nally,columnE shows businessand governmentinvest- recentlyintroducedcontrol procedures?The second ap- ment outlaysthat are mainlyfor pollutionabatement. proach has been adoptedin the United States; in effect Input-outputtables of the kind outlined in Table 5-3 pollutionabatementis definedas activities, like scrubbing havebeen quitewidelyapplied.Modelsdeveloped for the smokeor coolingwastewater,whichare undertakenbe- UnitedStatesand the Netherlandsare describedin OECD cause of recent antipollutionlegislation.The use of a (1974), modelsfor Italyand the United States are out- mobilebaselinemakesthe definition of abatementexpen- lined in Pearce (1976), and three differentmodels for ditures somewhat fuzzy,but it is probablythe only prac- Japanare describedin OECD(1977).Theyhavebeenused tical approachfor data collection.Respondents willhave to assess the effect of abatement policieson variables some notion of the extra outlaysthey have incurred be- such as price levels, consumption,investment,produc- cause of recent antipollutionlegislation,but they would tion, employment, and the trade balance. find it very difficultto estimate their costs if they were Data on pollution abatement outlays by government allowedto cause unlimitedpollution,becausethey have could be obtainedfrom a functionalclassification of gov- neverbeen in this position. Table 5-3. Input-Output Table Isolating Pollution Abatement Costs Producers i Gross fixed T Producers______________ |Government Private capital 1_________ f 2 Total consumption consumption formation Stocks Exports Totals PA Other PA Other PA Other PA Other PA Other Commodities I A B C D E I 2 Total __ _ indirectices . . . Rest of world l l l l abatementcosts. Note: PA = pollution Pollution Measuring withinthe Frameworkof theNationalAccounts 29 The second difficultyis the problem of joint costs. rangingantipollution lawsmaybe enacted,and, whenthis Some equipmentand industrialprocessesare both good happens,it is certainlyusefulto measure their effecton for business and less polluting. In such cases it is not industrialcosts.In other years,however, there maybe no clear how much of the additionalcost of the equipment new legislation requiringoutlayson pollutionabatement, or process should be treated as a pollutionabatement and there is then no obviousneed for a survey.In short, expenditure. In the UnitedStatessurvey,respondentsare the aim should be to measure PACE in response to a askedfor their "best estimatesof the cost of that portion particular piece of legislationin particular years, rather of plant and equipmentexpenditures attributableto spe- than to considera continuous time series. cial features for [air and water] pollution abatement" The second lesson is that the conventional surveyap- (Cremeans1974, p. 62). Respondentspresumably base proach-mailing questionnaires to a large number of re- their best estimateon the costs of alternative modelsthat spondents-may not be suitable for PACE statistics. As producethe same output as the equipmentacluallyused noted, the U.S. questionnairerequires respondents to but that lack the model'sspecialantipollution features.In estimate some importantcomponentsof PACE, but there the unlikely, but not impossible,eventthat a new pieceof are some pollutionabatement costs that haveto be ig- equipmentis as productiveas an older model but less noredbecauserespondentsare unaware of them.In these pollutingand less costly,it wouldbe reasonableto attrib- circumstances it maybe better to investigate a intensively ute a negativecost to the antipollution The U.S. activity. smallnumber of establishments. The larger samplinger- surveydoes not attempt to identifysuch cases, perhaps rors probablywouldbe offsetbythe smallernonresponse because of the difficulty of makingaccurate estimates. errors, and the enumerators could collect information However, new,less-pollutingprocessesmaysometimes be about abatementcosts that the respondentsdo not rec- cheaperthan older,more-polluting ones.An often-quoted ognize as such. In addition,serious pollutionproblems exampleis the switchby pulp and paper manufacturers are confinedto a relatively small number of industries: fromsulfiteto sulfateprocesses.Sincethe new methodis home heating, transport, electricitygeneration, chemi- both less pollutingand cheaper,the pollutionabatement cals, paper and pulp, and steel. Thus,an intensiveinves- involved has a negativecost. tigation of relativelyfew establishments may yield accu- A third difficulty concernsthe respondent'sawareness rate data on the bulk of pollutionabatementoutlays. of antipollutioncosts. For example, if new legislation forbidsopen-castmining,the additionalexpenseof shaft Benefits of Pollution Abatement mining should be counted as an antipollutien cost. In general, however,respondentswould probablyoverlook One of severalbenefitsthat may result from pollution costs of this kind and would in any event have great abatement is the recovery of usablematerials.In practice, difficulty in estimatingthem.Similarproblemsarisewhen such benefitsare usuallyquite small, and, if they can be antipollution pressuresresultin demandshiftsfrommore- identifiedat all, the most convenient wayto treat them in to less-pollutingproducts. Examples here include the a national accounts frameworkis probably as negative switch to unleaded gasoline,biodegradablezontainers, abatementcosts. Far more importantare improvements and low-phosphate detergents.These goods are all more in health, enhancedenjoyment from the natural environ- costlythan the more-polluting itemsthey replace,but the ment, and related benefitsthat the communityat large producergenerallywouldnot regardthe extra investment derivesfrom pollutionabatement.There are severalways and higher operating costs involved in their production to valuethese indirectbenefits. as a pollutionabatementcost. Indeed,in the IJ.S. survey, One possible approach is to consider the damages such costs are explicitly excluded, and manufacturers are avoided. Thus, if it could be establishedthat a particular supposedto report only the outlaysincurred in reducing type of pollutioncaused1,000 dollars'worth of damage, pollutionin their ownproductionprocesses. then it could be argued that abating this particular pol- Becauseof these problems,some criticshavesuggested lution providesbenefitsworth the same amount.Several that it is futileto try measuringbusinessoutlayson pol- authors have indeed assumed that damage costs and lution abatement.However, this positionmaybe too ex- abatementbenefitsare two sides of the same coin. Jaszi treme. In attempting to compile the PACE series, the (1971, p. 224), for example,doubts the possibilityof Bureau of Economic Analysisis respondingto a real measuringthe benefitsof environmentalprotection be- concernfelt by policymakers and business people, who cause he "cannot formulatea question relating to the need to know the costs involvedin differentpollution damagesof pollutionthat could be answeredby knowl- abatementpolicies.What is open to questionis whether edgeable respondents in a meaningfulway" (emphasis the approachused by the bureau is the best wayto meet added).The valuationof goods and services,however, is this need. There are two lessonsto be learned from the not generallybased on the assumptionthat the benefits U.S. experience.First, it maynot be usefulto compile a receivedequalthe damagesavoided.Clothingis not val- time series for PACE statistics.In someyearsseveralwide- ued at the cost-in terms of social ostracism or legal 30 Derek W.Blades penalties-of goingaround naked, and food is not valued Figure5-1. Supply and Demand for CleanAir at the cost of starvingto death. In conventional national accounts,goods and servicesare valued in one of two Price ways.Goodsand servicesthat are sold on the marketare (D) Demand valued at their market prices, that is, at prices that are \ assumedto measurethe purchaser'svaluationof the ben- efitsderivedfromthem,whilegoodsand servicesthat are PI providedfree or at heavily subsidized prices are valuedat their cost of production. P3 The outputs ofpollutionabatement-clean air and pure water,for example-obviously cannotbe sold on the rnar- ket. So the natural approachfor the nationalaccountant is to value the benefits of pollution abatement as being l_ equal to the costs of pollution abatement. If, as was P2 suggestedin the previoussection, abatementcosts were shownseparatelyin the national accounts,users would have all the informationneeded to valuethe benefitsof SI D3 pollutionabatement in preciselythe same way that the P3 benefitsof other publicgoods-national defenseor public administration, for example-are valued. This simple,orthodoxmethodof valuation maybe crit- ° A, A2 A, icized on the grounds that the market, or the community (dirty) Index of air quality - (clean) as a whole, may not necessarilyvalue the benefitqof abatementat the costs of abatement.The same objection may,of course, be made against valuingother nonmar- keted goods at cost, and several authors have indeed abatement understates the benefitsof abatementasjudged argued that all goods and services in the national ac- by the market. In the second case, the "at cost" value counts should be valuedat market prices regardlessof representedby 0, P3 , S3, A3 is much higher than the whetheror not they are actuallymarketed.Peskin and benefitsas judged by the market. For most people, type Peskin(1978)havesuggested howthis mightbe done for A3 air is not worth the cost; the market wouldpay only pollutionabatement. P3 ', and the area P3 ', P3 , S3, D3 represents the amount The problemmaybe demonstratedin Figure5-1. The by whichthe "at cost" valuationof abatementoverstates demandcurve (D) shows how much air cleanliness the the market valuation of the benefitsof abatement. market would buy at differentprices, while the supply To measurethe marketvaluation of abatementbenefits, curve (S) givesthe price of various levelsof air quality, it is necessaryto estimate the demand curve in Figure that is, the cost of abating air pollution.If clean air were 5-1. The direct approachof askingpeoplehowmuchthey sold on the market,the amountsuppliedwouldbe deter- would pay for differentamounts of abatementdoes not mined by the intersectionof D and S. The air supplied appear to have been widelyused. One problem is that wouldbe the moderately cleanA2 type,the publicwould shrewdrespondentsmaydeclareno interest in payingfor buy it at price P2, and the valueof purchases-the num- any pollutionabatement because they know that since ber that wouldbe recordedin the national accountsun- clean air and pure water are public goods, they could der household consumption expenditures-is represented never be excludedfrom enjoyingthem. This causes the by the area 0, P2, S2, A2. marketvaluationof abatementbenefitsto be understated. In practice, of course, the level of air pollutionis set Anotherdifficultyis that it is not clear whetherrespon- not by the market but by government fiat. A government dents should be treated as buyersor sellers of clean air sensitive to businesspressuresmightdecideon lowabate- and water (Seneca and Taussig 1974). Should they be ment standards that result in air of the rather dirty A, asked howmuch they wouldpayto enjoya givenlevelof type, whilea governmentdominatedby consumerinter- pollution abatement, or how much they would charge ests mightlegislateto produce very pure A3 type air. In polluters for the use of their clean air and water? The the first case, the number that goes into the national latter approach, which is based on the view that the accounts(as pollutionabatementcosts) is representedby inhabitantsof a countryhavecollective propertyrights in the smallarea 0, P1, SI, A,. However, the demandcurve their environment, wouldgenerally lead to a highervalu- indicates that the marketwouldhavepaid Pi' rather than ation of abatementbenefits.To be realistic,however, it is P, for the amountof pollutionabatementrepresentedby unlikelythat either question could elicit anything but Al, so that area P1, P1 ', D1, S, maybe taken as a measure fancifulresponses. People are simplynot very good at of the extent to whichthe "at cost" valuation of pollution puttingprices on thingsthat are never marketed. Measuring Pollutionwithinthe Framework of the National Accounts 31 In these circumstances,variousindirectapproaches may total damagescaused by pollution, they would indicate be used.For example,the benefitsof cleaninga lake may the successof abatementprogramsin reducingpollution be valued by finding out how much people spend at damagesovera period of years. presentto travelto the nearestunpollutedlake. This and Nationalaccounts have been widelyused to measure other indirect methods used in connectionwith water the costsof pollutionabatement.This is clearlyan impor- pollutionare summarized in Kneese(1971).The benefits tant use, since policymakers need to know the cost of of reducingtrafficnoisemaybe valuedby comparingthe alternativeabatement measures.Althoughthere are some prices of housessubjectto differentnoise levels.Several problemsin definingand measuringabatementcosts, in studies on airport noises in the United Kingdom are generalthe aimshouldbe to measurethe abatement costs discussedby Pearce (1976). incurredbyparticularindustriesin responseto particular The results of such studies have been used in some For this purpose, it willnot usually pieces of legislation. cost-benefitanalysesrelating to particular problems at be necessaryto constructtime series statisticson abate- particular times. In viewof the sporadicnature of such ment costs. To collectcost data from industry,in-depth studies and of the controversythat has sometimessur- investigation of a small sample of firms may be more roundedtheir findings,however, it is unrealisticto sug- effectivethan conventional surveymethods. gest that market measuresof abatementbenefits could be includedin annual national accountsstatisticswithin References the foreseeablefuture. Valuationat cost is all that can reasonably be achievedat present. R. U., andA.V.Kneese. Ayres, 1969."Production, Consump- tion,and Externalities." American EconomicReview 59(3, Conclusions June):282-97. Councilon Environmental Annual.Environmental Quality. This chapter has reviewedwaysin whichnational ac- Washington, Quality. D.C. counts statisticscan be used to assess and manage a Cremeans, Expenditures J. E. 1974."Capital for by Business major environmentalconcern-pollution. More specifi- Air and WaterPollution Abatement,1973 and Planned cally, it has examined how the national accounts can be 1974."Survey of Current Business54(7,July):58-64. used to study four aspects of pollution: the output of . 1977."Conceptual and Statistical Issuesin Developing pollutants,the damagescausedby pollution,the costs of Environmental RecentU.S.Experience." Measures: Review abatingpollution,and the benefitsderiveclthierefrom. of Incomeand Wealth23(2,June):97-116. The use of national accounts to study the output of Jaszi,George.1971. "Review." Surveyof Current Business51(7, pollutantswillhave a low priority in most countries.In- July)(PartII, 50thAnniversary Issue):183-227. formation on quantitiesof pollutantsemittedmust be site- Kneese,A.V.1971."TheBenefit-Cost of Environmen- Analysis specific in order to be used to monitorpollutionlevelsor tal Pollution."In Proceedings and Documentation of the to designcontrol measures. National totals forte output Ntionl toals or the UnitedNations Economic Commission for Europe Sympo- tomasurs. dsigncontol ouput sium on Problems Relatingto New Environment. York:United of pollutantsare of limitedvaluefor environmental anal- Nationso ysis.It is unlikelythat the nationalaccountscan be used Nations. OECD (Organisation for EconomicCo-operationand Develop- to measure the benefitsof pollutionabatement,at least ment).1974.Economic Implications of PollutionControL on a "market" basis. Although it may be theoretically Studies in Resource Paris. Allocation. possibleto attach market valuesto the benefitsof abate- _____ 77.Environmental in Japan.Paris. Policies ment, there are enormouspracticaldifficulties in doing Pearce,D.W.1976. Environmental Economics. London and so. For the foreseeablefuture the only way the national New York: Longmans. accountscan be used to valuethe benefitsof abatement Peskin,H.M.,andJ. Peskin.1978."TheValuation of Nonmar- is through the cost side. This method is used now by ket Activitiesin Income Accounting."Reviewof Incomeand nationalaccountantsto valueother publicgoods,such as Wealth24(1,March):71-93. nationaldefenseand public administration. Saunders,C. T. 1977."The Feasibility of Welfare-Oriented One can take a more positiveattitude toward other Measures to Supplement the National Accounts and Bal- aspectsof pollution.Althoughit is difficult to define and ances:A Technical Report."Studies in Methods, SeriesF, measurein full the costs of damagescausedby pollution, no.22.New York: United Nations. it seems feasibleto identifysome of the costs that are Seneca,J. I., andM. K.Taussig. 1974. Environmental Econom- alreadyimplicitly includedin the nationadaccounts. Ex- ics.Englewood Cliffs, N.J.:Prentice-Hall. ampleshere includepollution-related medicalexpensesin United Kingdom Atomic Energy Authority.1971.An Economic the final expenditures of governments and households as and Technical Appraisalof Air Pollutionin the UnitedKing- well as outlaysfor pollution-causedrepair and mainte- HerMajesty's dom.London: Office. Stationery nance in the intermediate consumption of industries. Al- Victor,Peter A. 1972. Pollution: Economy and Environment. though these expendituresconstitute only part of the Allen London: andUnwin. Correcting NationalIncome for Environmental Losses: Towarda Practical Solution Roefie Hueting An increasein nationalincomeis often called economic mentalfunctionscould then be establishedand entered growth.It is identifiedwith increased welfareand con- in the Systemof NationalAccounts(SNA) as cost items ceivedof as an indicatorof economicsuccess.However, whenthey occur. this terminology is incorrect for a number of reasons. Unfortunately, shadowprices for environmentalfunc- One of these is that the apparent increase in national tions can be constructed only in exceptional circum- incomemaybe accompanied by the degradationof a vital stances.It is possiblein principleto estimatethe cost of scarce good: the environment. The misconceptionof measuresthat lessen the pressure on the environment terms reflectsthe beliefthat thingsgo well,economically and thus preservethe desired uses of the environment. speaking,solelywhen production,as measuredin gross These so-calledeliminationcosts may be regarded as domesticproduct (GDP), increases. This belief also in- productioncosts of an environmental function. With the cludesthe conviction that an increasein GDP is necessary aid of calculationsof the costs of various degrees of to solve the environmental problem, since this creates elimination,supply curves for environmentalfunctions room for financingthe conservation and restoration of can be constructed.Only in a few cases, however, is it the environment. However, this propositionis questiona- possible to construct demand curves, because the de- ble to the extent that environmental deteriorationis a mandforenvironmental functionsusuallycannot manifest consequence of the prevailing pattern of production itself in market behavior.Therefore,other options need growth. to be considered.But as long as the traditional, uncor- The environmentis being endangered because eco- rected concept of GDP is used, many caveatsneed to be nomicpolicystressesthe increasein productionas meas- kept firmlyin mind. ured by national income,but it neglectsto account for the depletion of natural resources and damage to the The Need to Use GDP with Proper Caveats environment. This depletion, in turn, endangers sus- tained economicdevelopment. This gavea great impulse Whilework is goingon to correct the measurement of to the ideas of Kuznets,whosuggestedas early as forty GDP, one recommendation shouldbe implemented imme- years ago that national income be correctedto provide diately: proper caveats shouldbe used and additionalfacts politiciansand the public with a better insightinto the should be presented in the yearly publicationsof the development of welfareovertime (Kuznets1947, 1948a, nationalaccounts. 1948b). Thus, it has to be stressedthat an increasein national A bigstep in the right directionwouldbe possibleif all incomeis not identicalto economic growthand economic the factorsthat influencewelfarecould be expressedin success.Further,production,as measuredby GDP, is only one commondenominator(for example,money).For the one factor that influences the level of welfare. Other environment, this would involveconstructing shadow factorsare the environment (includingnature and natural prices for environmental functions(possibleuses of the resources), leisure time, income distribution, working environment),which are directly comparable with the conditions,employment, and the safetyof the future in- prices of goods and servicesproduced for the market.' sofar as it depends on our dealings with scarce goods. Withthe aid of these, the valueof the losses of environ- Therelationbetweenproduction growthand environment 32 Correcting National Income for Environmental Losses 33 in the past must also be madeclear. The burden on the paid for by the governmentor private households, or environment is equal to the product of the number of whentheyare takenby privatefirmsbut financedthrough people and the amountand type of activityper person. levies imposed by the government, they are currently Sustainable economic development thereforerequiresthat treated as finalconsumption. the nature of our activitiesand the number of our species However, all these outlaysshould be entered as inter- be adapted to the carryingcapacity of our planet; such mediateexpenditure when a long time series such as that adaptationsmaydecrease GDP in the short run but will for national incomeis composed.For the losses of envi- providesustainedeconomicdevelopment in the long run. ronmentalfunctionsare currentlynot entered as costs at It shouldalso be kept in mind that the SNA'S mainvalue the time they occur, and thereforetheir restoration or is for short-termmacroeconomic analysis.Finally,market compensation shouldnot be entered as a finaldeliveryat prices do not indicatethe marginalutilityof goodswhen the momentit is undertaken. This procedure cannot be their productionand consumption are at the expenseof changed because it is impossibleto construct shadow scarce environmental functions. prices.It is thereforedoublecountingto enter outlaysfor In additionto such caveats,as much quantitativeinfor- compensating these lossesor for eliminating them as final mation as possibleshould be providedon the losses of consumption. Expenditure on preventingand compensat- environmental functionsand their consequences. To the ing environmental lossesdoes not contributeto the quan- extent possiblethis should be done in rrmonetary terms, tity of consumergoods; these outlaysprotect or replace such as compensation and elimination cositsand financial scarce environmental goods that were already available. damage.This can be supplementedby informationex- (Someof the disadvantages attributedby Kuznetsto the pressed in physicalunits, such as emissions,concentra- urbanpattern oflife,such as the greater distancebetween tions, fragmentationof the countryside,and losses of home and work, maybe interpretedas losses of function species.The figures in physicalterms can be related to resultingfrom spatial competition,and the expenditure standards for environmental functionsand will thus de- on this as the cost of compensatory measures.)2 scribe their availabilityor loss. For exarnple,if certain Most authorities in this field, including most partici- thresholdsof emissionsand subsequentconcentrations pants in the uNEP-World Bank workshops on environ- are exceeded,the function of surface water as a basic mental accounting,favoreither merely isolatingthe de- materialfor drinking water is lost. The informationin fensive outlays for the environment or isolating and physicalunits could be collectedin so-called satelliteac- correctingfor these items in an alternativepresentation countsof the nationalaccounts(Theys,Chapter7). of national income alongsidethe current one. In both The recommendations made above-that proper cave- cases, the time series would not be interrupted. The ats be used and that GDP be supplementedby monetary current figure would remain intact for analytical pur- and physicalinformationon the environment-can and poses, but the interactionbetween production and the should be implemented immediately.T'he rest of this environment wouldbe better understood, and the ability chapter reviews three optionsfor correctingC.DP. to provide informationin physicalunits and to collect these data in satelliteaccountswould,of course, not be Correcting National Income for Defensive hamperedat all. Environmental Outlays The approach of isolating and correcting, however, seemspreferable. The politicians and the public,whoare Whennational incomeis calculatedaccordingto pres- now givenonly one figure of income,wouldthen realize ent conventions, severalactivitiesthat have a cost char- that part of the increasein nationalincomeconsistsof an acter, and thereforeought to be entered as intermediate increase in cost, since defensiveenvironmental outlays deliveries,are currentlydesignatedas finadconsumption. are increasing(Leipert 1987). If the income correction Kuznets,one of the great theoreticians of the conception was made, however, severalclarifications would have to of nationalincome,emphasizes this point (Kuznets1947, be made in the introduction of national accounts 1948a, 1948b). publications. To the three classes of expendituresdistinguished by Kuznets (expenditureinvoked by an urban pattern of * The correctionis onlypartial, since the greater part living,expenditureinherent in participationin the tech- of environmental lossesare neither restored nor compen- nicallyand monetarilycomplexcivilization of industrial sated. countries,and the majorpart of government activity),the * The mutations in both the current and corrected expenditure on measuresthat compensatefor, redress,or figures of GDP do not represent economicgrowthor the guard againstlossesof environmental functionscouldbe courseof welfareovertime. added.Theseexpenditures are currentlye:ntered as inter- * Reallocationby shiftingthe productionand consump- mediatedeliveries insofaras the measures, are taken, and tion packageon behalfof the environment (for example, directlypaid for, by privatefirms.Whenthe measuresare more bicycles and publictransport and fewerprivate cars 34 Roefie Hueting becauseof the pressureof physical restrictionsand levies) * In order not to make the questioningunjustifiably constitutesa sacrifice.This is not reflected in the SNA, vague,some research on environmental accountinghas insofar as the pattern of consumptionthat is thus pro- to be done beforehand.For clear air, clean water,and so duced differsfrom the first choice,whichwasmadewith- forth are not homogeneous goodsfroman economic point out regardto environmental considerations. The shiftswill of view,as water and air have quite a few differenteco- often lead to a check on production growth.This is auto- nomic functions.If the persons being questionedare to maticallyreflectedin the SNA but is not visible. have a clear picture of the issues, they must be given * Isolation and correctionformpart of a broader field information on the significance of the differentfunctions, of defensive outlays(see Hueting1980;Kapp1963; Kuz- the consequencesof their loss, and the measures and nets 1947, 1948a, 1948b, 1954; Leipert 1986a, 1986b; costs involved in their restoration.All together this con- Mishan1984;and Tinbergen1985). stitutes a huge amount of information, whichwould not be easyto survey.Although the willingness-to-paymethod Complementing Correctionsfor Defensive Outlays might be justified for one or two factors affectingthe through Surveys immediatelivingconditionsof people asked, it is most probablynot a sound base for correctingnationalincome The possibilitiesfor preferencesfor the current and for all environmental losses. future use of environmental functionsto manifestthem- * Peoplemaybe interestedin the effectsof their bids, selvesin marketbehaviorare verylimited(Hueting1980). together with the (unknown)bids of others, on, for in- Thereforeeffortshave been madeto trace these prefer- stance, .employment levelsand consumptionpatterns. For ences byaskingpeoplehowmuchtheywouldbe prepared answering legitimatequestionsabout this, studiessuch as to pay to whollyor partially restore lost environmental the scenario study mentioned belowhave to be elabo- fts th being rated, and the resultshaveto be presentedto the persons dfncton willingness to pay.cHoweverm this method does questioned. This hardlyseemsfeasible. Again,what might neo not alwillinnes always tolpay. providereiable forthis However eStimateS manymethods. reasons. be justifiedon a micro scaleis most probablynot justified on a macro scale. Informationon the significanceof environmental * Askingpeople howmuch they are prepared to pay functionsis deficientin manycases.This is especially so suggests that conserving the environment always requires for the functionsthat determinethe future qualityof the extra provisionsthat must be paid for. In quite a few environment. For these (life-support) functionsthere is cases, however,conservationis a matter of refraining oftenthe risk that interruptingcomplicated processes,for from doing things rather than of doing them, and this instance,ecosystems, maylead to seriousovershoots and savesrather than costsmoney.Thus,not buildinga road collapse,and the chance that technologies not yet in- through a mountainous area that is vulnerableto erosion vented or operationalmay cope with those risks. Many is cheaper than buildingit, cyclingis cheaperthan driv- peoplemaynot be able to weighthese risksand chances, ing, wearing a sweater and using an extra blanket is and thus to answerhowmuch they are prepared to pay cheaper than raisingthe temperature,and confiningthe for avoiding them.According to the biologicalliterature, consumption of lettuce to the summerseason is cheaper the possibility that overshootsand collapsemay occur if than eating it throughout the year. People who realize the growthpattern of production(and population)is not this maymodifytheir answersbecauseof such considera- changedconstitutesthe most importantpart of the envi- tions. ronmental problem (see, for example,Odum 1971). If * Some peoplewillprobablybe convinced that it does individuals are not awareof the importanceof an environ- not matter what theybid becausetheir bid willnot influ- mentalfunction,the surveymethodis pointless. ence environmental policyat all, and this conviction will * There is a considerabledifferencebetween saying influencetheir bid. that one is willingto spend money on somethingand * Some people may think they have a "right" to a actuallypayingfor it. healthy and safe environmentand will probably react * The questioning methodin fact tries to approachthe accordingly by not makinga bid at all. valueof a collective good as ifit werea privatemark.etable a Some people willprobablyhave their doubts about good(bytryingto findsomepointson the demandcurve). the participationof others (the Prisoner'sDilemma from In a market the bidder knowsfairlywellwhat qualityand gametheory) or prefer to waitand see (the Free Rider quantitycan be acquiredby differentbids. In a collective Principlefromthe theoryof collective goods). situation, however, this is not possible,becauseit is not * The environmentis an important collectivegood. knownhowmuch other people are goingto bid. Without But it is not the only one. Dikes, public administration, a considerable amount of additionalresearch it is also and the army are too, while police and educationhave not knownhow much moneyis requiredto attain differ- clear collectiveproperties.To be sure of not exceeding ent qualitystandardsfor the environmental functions. budget restrictions,people also have to be questioned Correcting Incomefor Environmental National Losses 35 about howmuch they are prepared to pay for the other mates of the expenditureon the measuresrequired to collectivegoodsof the society.This hardlyseemsfeasible. meet physical standards for the availability and qualityof Again,what might be justifiedfor one or two separate environmental functions (includingnature and natural environmental agentson a micro scalemaybe impossible resources).4 The standards can in turn be based on the on a macroscale. prerequisites of healthand a sustainableeconomicdevel- * The willingness-to-pay method also measures the opment,that is, development withsustainableyields.This consumer'ssurplus.In national incomethe total valueof seemsthe most naturalguidelinefor setting standardsfor the goods is found by multiplying the quantity of each environmentalfunctions. Standards and the measures good by its respectiveprice and then addingtogetherthe based on them mayreferto the occupationof space, the resultingamounts.Usingthis procedure,the consumer's use of soil, the availabilityof stocks of natural resources, surplusis not expressedin the levelof nalional income. the compositionof products, the consumptionof raw Thus, a doctor who savesa patient's life creates a value materialsand energy,the emissionof pollutants,and the that, whateverone may think about its exact size, is concentration of chemicaland other agents. certainlyhigherthan the valueaddedrecorcled in national The standards can be related to environmentalfunc- income.The intra-marginal utility of goods,whichis ig- tions. Thus it is possibleto formulatethe wayin whicha nored in nationalincome,willapproachan infinitevalue, forestshould be exploitedto attain a sustainableuse of becauseit includes the utility of the first unit of food, its functions. Thesefunctions couldincludebeinga source drink, and so forth. For this reasonthe resultsof willing- of wood, regulatorof the water management,preventer ness-to-pay research are not suitableto be used in con- of erosion, bufferof carbon dioxideand heat, regulator junction with the figures of national incc,me.An addi- of the climate,gene reserve,objectof studyfor ecological tional objectionto incorporatingthe consumer'ssurplus research,supplierof natural productsfor the local popu- in the willingness-to-pay approach is that the resultsre- lation,and sourceof incomefromtourism.The estimated flect the income distributionmore directlythan do the expenditure on the measuresrequiredto meet those stan- prices of market commodities; the differencesbetween dards then indicatesin monetaryterms howfar a nation rich and poor in the weightsof the "votes"become greater has drifted awayfrom its (supposed)end or standard of whenthe consumer'ssurplusis included.The occurrence sustainable use of its forestresources. of differences in weightsof "votes" is often defendedby Likewise it is possibleto formulatethe way in which the argumentthat the contributionto the nationalpack- surfaceand groundwater should be exploitedto arrive at age of goods and servicesby the rich is greater than by a sustainableuse of its functions.These functionscould the poor: their incomesare higherbecauseof the greater include water for drinking,for agriculture,for cooling, relativescarcityof their abilities.This argument is not for flushing and transport, for industrial processes,for validwith regard to the environment, because it is not recreation,for navigation,in the natural environment, producedby humanity. and forwastedumping.The estimatedexpenditureon the Becauseof the limitationsmentionedabove,the willing- measuresrequired to meet those standards would indi- ness-to-paymethoddoes not presenta firm enoughbasis cate in monetaryterms howfar a nation has drifted away for correctingnationalincome for lossesof scarce envi- from a sustainableuse of its water resources.The same ronmentalfunctions.A correctionbased on this method holdstrue for the use of air, soil, and space. lead to inaccurate estimates of envi.ronmental may de- The measuresmayrange fromselectively cuttingtrees, mlea. buildingterraces,drainingroads, maintaining reforesting, mine, buffersin the landscape,and selectively using pesticides and fertilizersto buildingtreatment plants, recirculating Complementing Corrections for Defensive Outlays materials, introducingflow energy, altering industrial through Standards for Sustainable Economic processes,makingmore use of public transport and bi- Development cyclesinstead of private cars, and using space so that plant and animalspecieshave enough room to survive. It can be concludedfromthe abovethat the correction Whenput into practice,these measureswilllead, in one of nationalincomeis highlydesirable.But shadowprices way or another,to different-sustainable-productionand for environmentallossesthat are directlyccmparable with consumption patterns. It followsfrom the earliersections market prices (on which national income figures are in this chapter that the levelof welfarewillnot decrease based)can be constructedonlyexceptionally, becausethe if people prefer to maintain a sustainabledevelopment intensityof the preferencesfor the present and future rather than to risk the overshootsand collapseinherent of environmental availability functionscan mostlynot be in the present production and consumption patterns. measured. For this problem there is a well-defensible Whetherthis is the case cannot be provedor disproved, practicalsolution.This consistsof supplementing the cor- becausein manycasesit is impossible to constructshadow rections for defensiveenvironmentaloutlayswith esti- pricesfor environmental functions. 36 Hueting Roefie Table6-1. Comparisonof Traditionaland EnvironmentalScenarios (1980= 100) Traditional Environmental Aspects growthscenario scenario Plant and animalspecies Further deteriorationby, among Checkeddeteriorationor even other things,increasedproductivity improvement in agriculture,more use of space, and more use of persistentcom- pounds;onlymeasures againstpol- lutionhavebeen taken Emissions Air pollution Sulfurdioxide(SO 2) 154 24 Nitrogenoxide(NOr) 130 76 Particulatematter 310 58 Hydrocarbons 266 48 Carbonmonoxide(CO)(total) 290 31 Processes 75 Stationary - 48 Transport 36 21 Carbondioxide(CO 2) - 83 Lead 44 0 Waterpollution Mercury 53 29 Cadmium 79 36 Otherheavymetals 109 57 Persistentorganiccompounds - 7 0b Phosphates 81 29 Oxygen demand 35 17 Thermalload 139 44 Solidwaste 152 108 Harborsludge - 100 Energyrelated 1,400 467 Gypsum 210 90 Industrialslag 358 136 Chemicals 91 64 Radioactive waste Laboratory waste 100 100 Nuclearenergywaste 300 0 Reprocessing waste 598 0 Fissionable material 633 0 Energyinput 123 81 Coal 505(605)c 292 Uranium 463(0)' 0 Landscape Further deterioration(seeplant and Checkeddeteriorationor even animalspecies) improvement of cities Livability - Improvement Production CDP 164 127 Agriculture 181 135 Industry 321 177 Services 181 145 Availableincomeper capita 116 104 Unemployment 82 83 Employment 110 111 Tax burden 98 103 -= Not available. a. Thisfigure is notconsistentbecausethecarbon monoxide emissions of processes sources andstationary aremissing. b. Very rough estimate. energy c. If nuclear is notused,coalinputincreases. Source:Hueting 1987. National Correcting Losses Incomefor Environmental 37 The expenditurenecessary to carryout thesie(and sim- The mainresults of the studyare shownin Table 6-1. ilar) measurescan be estimated.The sum ofthe amounts The total net expenditure(or cost of forgoneproduction) found wouldindicatein monetaryterms howfar the na- to meet the conditionsor standards set in the environ- tion has drifted awayfrom a sustainableeconomicdevel- mental scenario is equal to the difference in gross na- opment. This indicatorcan be used in conjunctionwith tional product (GNP) betweenthe two scenariosin 2000. the figuresof the nationalincome,which,after correction The benefits(in regainedand safeguardedenvironment) for defensiveoutlays,showshow far the nation has pro- are equal to the differences in the environmental indica- ceeded in raisingthe levelof production. tors in 2000. A similarstudy is in progress for Taiwan No measurescan be formulated for irreversiblelosses. (Hueting1986a). If plant and animalspeciesbecomeextinct,no restoration An example of a practical applicationof correcting measuresare possible.The same probablyholdsfor the nationalincomefigures,albeitnot based on standardsfor total loss of the topsoilof a mountainousarea. An arbi- attaininga sustainableeconomicdevelopment, is the study trary value then has to be assignedto these losses, of by the Economic Councilof Japan, which developsa whichone can say for certainonlythat the valueis higher measure of net national welfare.In this approach the than zero. nationalincomefiguresare correctednot only for actual A more or less similar problem seems to arise for expenditureon compensation and restorationof environ- nonrenewable resources.Onceoil has been exploitedand mental functions,but also for the estimatedcost of the exportedor used, it is gone forever. This loss constitutes measuresnecessaryto attain the level of environmental a cost for the country,since oil reservesare finite.If no quality prevailingin the base year (in this case 1955). alternativesare developed,the generation that experi- Thus, de facto, a correction of national income figures ences the depletion (or a sharp rise in the operating on the base of standardswaselaboratedthere (Economic costs) of the resource willsuffer a severeeconomicloss. Councilof Japan 1974,pp. 99ff). Since the prospect of a safe and prosperous future for De Groot(1986) can alsobe mentionedin this respect. one's childrenand one's children'schildranis a normal In that studythe ecologicalparametersare formulated for humanneed, the diminution of the reservesof nonrenew- the performanceand sustainableuse of, among others, able resources such as oil constitutesa cost here and the functionsof water purification, fishery,gameanimals, now. and nursery.The Stimulation Programme for Researchin The depreciation of nonrenewableresources can be HumidTropical Forest Lands (Tropenbos)is now con- valued by estimatingthe costs involvedin the develop- ductingresearch on the conditionsfor the conservation ment and practical introductionof alternativessuch as and rationaluse of forests and forestland resourcesand solar energy, substitutes for minerals, and recycling on howto bring these conditionsinto practice(Bax and methods. others 1986; Ross and Donovan1986; Grainger 1987; An example of a practical applicationis a scenario Hueting1986b).Apart from these and other, more inte- studyelaboratedfor the Netherlands (Hueting1987).This gral, approaches,numerousstudies notablyon the meas- study scans the effects on the level of production and ures and costsinvolved in reducingemissionsof harmful employment of the transition to a sustainableeconomic agents have been carried out in quite a few countries. development between 1980 and 2000. The conditionsor Somehealthstandards havebeen establishedfor the con- standards for such a development and the measuresto centrationof harmfulagentsallowed for variousfunctions meet these conditionsor standards were formulatedby of water and air, such as drinking,swimming, and physi- specializedscientificinstitutes. The estimated costs of ological functioning. these measures were enteredinto the econometric model, From these experiencesit seems feasible to correct whichthen scanned the effects on production and em- national income figures on the basis of standards for ployment. The resultswere contrastedwith the resultsof health and a sustainable economic development. The a scenario based on a traditional growthpolicy,elabo- methodhas three advantages and four drawbacksor im- rated alongsidethe environmental scenario. Thus, com- perfections. parison of the outcomeof the two scenarioscan indicate The first drawbackis that the results of the approach the differences between a policy aimingat sustainability do not represent individual valuations in the true sense, and one aimingat increasing the nationalincomeaccord- as has beenextensively explained above.For,amongother ing to the present pattern. Because the environmental things, the intensityof the preference for a sustainable scenario makes an importantstep in the directionof a economicdevelopment cannot be measured.This simul- sustainable economicdevelopment over the wholefieldof taneouslyimplies,however, that the intensityof the pref- productionand consumption, comparisonolfthe results erences for the acceptanceof the adverse effects and of the two scenarios also gives a rough impressionof future risks involvedin the present growth pattern of what may be expectedif GDP is correctedaccordingto productionand consumption, and thus for the growthof standardsfor a sustainableeconomicdevelopment. GNP, is equally unknown. Both of these aspectsshouldbe 38 RoefieHueting clearly mentioned when the results of the method are environment severalpossibleuses can be distinguished. These presented in the publications of the national accounts. are calledenvironmental functions.Whenthe use ofan environ- Second, the method ignores the loss of welfaresuffered mental functionby an activityis at the expense of the use of by people who have a strong preference for the survival another (or the same)functionby another activityor threatens of plant and animal species apart from their role in main- to be so in the future, loss of functionoccurs;lossesof function taining the life-support functions of our planet (which is constitutecosts. In this situation,which is called competition lfore-susofutaionabe tainreruingthe d lourpmenet).(whee ps between functions,the environmenthas an economicaspect. a prerequisite for a sustainable development). These pref- Competition between functionscan be qualitative,spatial, or erences could be compared with the preferences for cre- quantitative.Qualitative competition amountsbroadlyspeaking ating and maintaining art or churches. This might not be to pollution:the use of the environmental function "dumping considered indispensable for sustainable development and ground for waste"is at the expenseof other functions.It is as yields, but their loss would constitute a decrease in wel- if there were an intermediatestep. An activityintroduces an fare for those who appreciate them. The same holds true agent (forinstance,a chemical, heat, or noise)into the environ- for species that might not be considered indispensable ment, as a result of whichthe qualitychanges;this maydisturb for a sustainable economic development. This too should other uses or render them impossible. In spatialand quantita- be mentioned when presenting the results. tive competitionthere is not enough space or matter to meet Third, no measures can be formulated for irreversible the existingdemandfor it. The use of a functionalso includes losses. This holds true for any method. Fourth, the the passiveuse of the function"natural environment" to con- method is laborious. serve the actual and potentialutilitiesof ecosystems, nowand in the future,and to retainthe diversity of speciesof our planet. The first advantage to the method is that it seems to Competition betweenfunctionscan take all sorts of forms.But provide an acceptable supplement to national income fig- in most casesit is a questionof the environment beingused for ures by indicating the losses of environmental functions production and consumption activitiesat the expenseof another in monetary terms, since shadow prices cannot be con- desireduse (Hueting1980). structed. 2. This chapter follows the usual procedureof classifying as Second, the method compels the definition of an exact compensation costs expendituressuch as extra provisions for content of the term "sustainable economic development." the drinkingwater supply,buildingswimming pools when the Without such a content the term remains vague and not waterhas been polluted,or travelcosts to natural parks when operational for economic policy regarding the environ- naturalareas in the vicinity havedisappearedand of classifying ment. as financialdamagesuch effectsas diminished productivitybe- cause of damageto crops and acceleratedcorrosionor devalu- Third, the physical data required for comparison with ation of properties caused by pollution. At the same time, the standards come down to basic environmental statistics asking people how much they would be prepared to pay to that have to be produced anyhow if we are to get a grip conserve and restorethe environment is classifiedunderwilling- on the state of the environment. The formulation of the nessto pay.Someauthors,however, placeall of these categories measures to meet the standards and the estimates of the underwillingness to pay. expenditure involved are indispensable for policy deci- 3. An overview of the methodsused, includingquite a few sions. In other words, the work necessary to supplement results(albeitnot in the contextof correctingnationalincome national income figures might be laborious, but it has to figures) can be found in Kneese (1984), Ewers and Schulz be done anywayif one wants to formulate a policy on the (1982),and Schulz (1985).For criticismof the method in the environment, environmental field,see Kapp(1972,pp. 17 ff). Based on the arguments given above, the national in- 4. Whenthe application of all available technicalmeasuresis come figures shudbecreceoinsufficient to meet a standard, the estimatesmust be supple- come figures should be corrected for the losses of envi- mentedwiththe marketvalueof the reductionin activities (in ronmental functions (including resources) on the basis of additionto the measures)necessaryto meet the standard. standards for health and a sustainable economic develop- ment. This would provide alternative national income fig- References ures alongside the existing ones. The differences between the two will show politicians and the public in monetary Bax, J., R. Hooghiemstra, and H. deWitte,eds. 1986.Initiating terms how far the country has drifted away fiom the a GlobalResearchProgrammeto Conserveand Develop course of sustainable economic development. Tropical RainForests.TropenbosInformation Series 1. Ede, Netherlands: Tropenbos. Notes Economic Council of Japan. 1974. MeasuringNet National Welfare of Japan. Tokyo. 1. Thischapter uses the conceptof environmental finctions, Ewers,H. J., and WernerSchulz.1982. Die monetarenNutzen which was designed to describe the economicaspect of the gewasserguteverbessernder Massnahmen-dargestellt am environment. For an economicapproach,the environment can BeispieldesTegelersees in Berlin.Berlin:Erich SchmidtVer- best be interpretedas the physicalsurroundings of humans,on lag. whichthey dependcompletely in all their activities.Withinthe Grainger,Alan. 1987. Report of the 7iel Consultation 27-31 Correcting National Incomefor Environmental Losses 39 October1986. TropenbosInformationSeries 3. Ede, Neth- . 1948b. "Discussionof the NewDepartment of Com- erlands:Tropenbos. merce IncomeSeries (NationalIncome:A New Version)." Groot,R. S. de. 1986. "Functionsand SocialEconomic Impor- Reviewof Economics and Statistics30:151-79. tance of the Dutch Waddensea."Agricultural University, . 1954. "NationalIncomeand EconomicWelfare."In Wageningen. Processed. SimonKuznets, ed., EconomicChange.London. Hueting,Roefie. 1980. New Scarcityand EconomicCrowth. Leipert,Christian.1986a."SocialCostsof Economic Growth." Amsterdam: North-Holland. Journalof EconomicIssues20(1): 109-31. . 1986a."Reporton MyVisitto Taipei as an Adviserfor . 1986b. "Whatthe GNP Does Not Accountfor." Devel- the Taiwan2000 Study."CentralBureauof Statistics,Voor- opment:Seedsof Change(3):58-65. burg,Netherlands. Processed. _ . 1987. "Folgekosten des Wirtschaftsprocesses und Volk- . 1986b."Framework for a Cost-Benefit Analysisfor Dif- swirtschaftlichteGesamtrechnung;Zur Identifikationvon ferent Uses of a HumidTropicalForest Area." Paper pre- steigendenkompesatorischen Ausgaben in der Sozialproduk- sented for the Tropenbosseminar,September22-24. Tro- trechnung."Projektbericht. InternationalInstitutefor Envi- penbos,Ede, Netherlands. Processed. ronmentand Society, Berlin.Processed. . 1987. "An Economic ScenarioThat GivesTop Priority Mishan,E. J. 1984. "GNP: Measurement or Mirage?" National to Savingthe Environment." EcologicalModeling38:123- Westminster Bank Quarterly Review(November):2-13. 40. Odum,E. P. 1971. Fundamentals of Ecology.3rd edition.Phi- Kapp, K. W. 1963. Social Costs of BusinessEnterprise.Lon- ladelphia:W.B. Saunders. don:AsiaPublishingHouse. Ross,M.S., and D.G.Donovan. 1986. "World TropicalForestry . 1972. "SocialCosts,Neo-Classical Economics, Environ- ActionPlan: Can It Save the TropicalForests?"Journalof mentalPlanning: A Reply." SocialScienceInformation 11(1): World ForestResources Management 2:119-36. 17-28. Schulz,Werner.1985.BessereLuft, was ist sie uns wert?Eine Kneese,A. V. 1984. Measuring the Benefits of CleanAir and gesellschaftlicheBedarfsanalyzeauf der Basis individueller Water.Washington, D.C.:Resources for the Future. Zahlungsbereitschaften. Berlin:Erich SchmidtVerlag. Kuznets,Simon. 1947. "NationalIncomeand IndustrialStruc- Tinbergen,Jan. 1985. Production, Income and Welfare:The ture." Proceedingsof the InternationalStatistical Confer- Searchfor an OptimalSocial Order.Whitstable: Harvester ences,Vol.V (TheEconometric SocietyMeeting,September Press. 6-18, 1947,Washington, D.C.).Calcutta. . 1948a."Onthe Valuation of SocialIncome." Economica (February/May):1-16, 116-31. 7 Enironmental Accountingin Development Policy: The FrenchExperience Jacques Theys The French experience might be a valuableguide in * Level11comprisescompositeyet sectoral statistics evaluating the outlook for environmental accounting,be- on water,atmosphere, land, noise,and so forth; these are cause originalconceptshavebeen developed and a wide generallyby-productsof administrativeactivity.During range of statistical tools tested there during the past the past severalyears, statisticaland documentary data decade. The French examplethus makes it possibleto banks havebeen addedthat coversuch areas as industrial take rapid stock of the manydifferentapproachestaken risk, marine pollution,regionalflora and fauna, and the by the developed countries,for whichit has provento be cost and efficiency of nonpolluting technologies. an exemplary testing ground. In a period of economic * Level III features comprehensive studies published crisis,the concernto incorporatethe environment more periodically or compiledfrom a wide range of sources: effectivelyin economicpolicy has in recent years led national (and, more recently,regional) reports on the France to promote the establishmentof "natural patri- state of the environment, indicatorsof progress in meet- mony accounts," which are similar to Norwegian"re- ing the nationaleconomicplan, or a compilation of eco- source accounts."' However,it would be givinga clis- nomicdata. These studiesbring together in a singledoc- torted viewof realityto isolatethese patrimonyaccounts ument all existing information on environmental fromthe overallenvironmental system.Their information expenditure, damagecosts,and the macroeconomic effect part in the planningprocess, and the very methods by of environmental policy. whichthey are drawn up, are meaningfulonly in this * LevelIV contains actual environmental accounting. overall framework. On the one hand, there are patrimonyaccounts, which willbe discussedlater and whichare usuallyexpressedin physicalterms. On the other hand, there are satellite The French Stratified System of Information accounts,whichare meant to organizeprimarilymone- tary data. Peripheralto the national accountingsystem Information currentlyavailableon the environment in (whose accountingnomenclaturesit borrows), satellite France is formallyorganized into a hierarchicalsystem accountingis designedto assessnational environmental that comprises six levels,ranging from field data (which expenditure, its funding,and its beneficiaries. As yet, only are extremelyfragmented)to global indicators of the a fewcategoriesof this systemhaveactuallybeen set up: qualityof life and pollution(Figure7-1). water,waste,nationalparks, and hunting. * LevelV includestwo models,since the accounts in * LevelI includes a large number of heterogeneous LevelIV alone are not sufficientto be used as a basisfor data, either specificto the environmental field(results of forecastingor simulations. The first model (POLLEN) is scientificinventories or monitoringnetworks)or nonspe- designedto estimatethe effecton such issuesas produc- cific(socioeconomic data).The qualityof this information tion, prices, and foreigntrade of variousenvironmental can vary considerably becausethere is no adequate sys- policies. The second (SPIRE) operates in the opposite tem of standardization; for example,attempts to institu- directionand is used to assessthe pollutionor resource tionalizeecological balance sheetsin businessfirmshave extractionlevelslinked to variousdevelopment strategies failedthus far. or alternateproductionand consumption processes. 40 Environmental Policy:The FrenchExperience in Development Accounting 41 Figure7-1. The FrenchEnvironmentalData S'ystem LevelVI \ Aggregate welfare National indicators; aggregates GNP modified | Simulation model . | Forecasting model |National of the effects of of macroeconomic effects / accounts Level development scenari'os t - <_ of environmental 1 policies< Models on the environmentMareomi _/ ~~~~~~ ~ ~~(SPIRE) (POLLEN) models of of theEeffects of macroeconomic ffects acconts _. patrimony Level IV [\P Environmental accounts Accounts Patrimony account satellite account National accounts t LevelLState \ of the Regionalreports Pl roEss conomic data on Plan data Statistical environment on the state of _ lain progres the environment / syntheses (national report) the environment indicators (annual report) Damage assessment ev Periodic sectoral statistics Sectoral r, i . Data banks statistics ~Water Air Soil Flora/ Others fauna Level I Specific data Nonspecific data 1 Dis Level I |(results of monitoring (production, consumption, | } tDisaggregated | networks and population, energy, I basic datay | scientific inventories) agriculture, and land use) - - - - Prospective relation; not yet implemented. indicatoirs. * LevelVI concerns quality-of-life As yet, the overalldevelopment of local livingconditions.How- France has made no attempt-unlike the United States ever,these effortsare still experimental. and Japan-to supplementgross national product (GNP) with one or severaladditionalrepresentativeindexes of Naturally,all of these levels are linked in varyingde- national welfareor wealth.Indeed,using a multicriteria grees to external informationsystems,such as research methodology, some work has been undertakento assess resultsin publicationson the cost of damagescausedby 42 JacquesTheys pollution,generalmacroeconomic theories on whichthe systemis a long-standing criticismof the inadequacies of operationof the SPIRE and POLLEN modelsdepends,and GNP and economic aggregatesas welfareindicators;this demographic and economicstatistics that are used to also existsin severalother developed countries.Bertrand supplement reports on the state of the environment and de Jouvenel(1966) officially proposed that the national to build up basic data. Morerecently,a connectionwas accountsincludeenvironmental services,the cost of pol- established betweenthe naturalpatrimony accountsdrawn lution, and resourceextraction.He did not want to abol- up by the Ministryof the Environmentand economic ishexistingstructures,but to appendsupplementary com- patrimonyaccountsestablishedby the NationalInstitute ponentssuitablefor long-term use. 2 Theseinterfaces of Statistics. allrepresentareas in which It became clear, however, that a simple adjustmentof the environment could potentiallybe incorporated in a the existingsystemwouldnot be sufficient. That is why, generalpolicyframework. after the existingenvironmental data systemswere first The structure described above is not the result of a critiqued,it took ten yearsbefore a decisionwasmadeto preestablished plan, but of an empiricalcombinationof establishthe patrimonyaccounts. Muchdata on the en- sets of data compiledto meet specificneeds over time. vironment but it is poorlyintegratedinto the is available, The variouslevelshavedeveloped in a quasi-independent planningsystembecauseit is fragmented.It is alsodiffi- manner.Initially, modelswere constructedand indicators cult to competewith a systemof economicdata shaped weredeveloped veryrapidlyand reliedheavily on nonspe- by decadesor centuriesof accounting practice. cificdata (on productionactivities) and experts'statistics. What is neededto developenvironmental accounting is Overthe years,statisticscollectedin the field(for exam- a processsimilarto the one forty years ago, whichpro- ple, the resultsof monitoringnetworks)began gradually duced the Systemof NationalAccounts (sNA). Such a to replaceestimates,thus facilitating a broader dissemi- process would developa consistent frameworkthat re- nation of comprehensive documents,such as reports on flectsthe complexity of the relationshipbetweenhuman- the state of the environment. In the late 1970s a partial ity and nature as clearlyas possible;wouldcreate a stan- reorganizationof data based on accountingprinciples dardizedlanguage, whichmaybe adoptedby economists, and data banks was envisaged.Subsequently, statistics environmental managers,and scientistsalike; and would were compiledon a regionalbasis and field data were devisea streamlined set of indicatorsto serve as a basis standardized. for decisionmaking. The development of this data base explainsin part why todaythese variouslevelsare not regarded as formingan Assessingnaturein all of its dimensions.The French integratedsystem. The drawbacksof this type of step-by- accounting systemattempts to includeall componentsof stepprocessare a certain amountof duplication, wastage, nature that can be quantitativelyor qualitativelychanged and a lack of connectionsbetween differentbodies of by humanactivity. Components that lie outsidethe realm data. The advantageis that each componentis adjusted of human influence(such as geomorphology, solar rays, to the specific requirements for whichit was designed.In or magneticfields) are thus excluded.Definedthis way, this connection it would be interesting to determine naturalpatrimony can be consideredas: whether empiricism-andthe associated wastage-are un- * A collectionof isolated components:nonrenewable avoidable, or if the developing countries can be spared components (such as metallicore or fossilfuel), environ- thisstage of a trial-and-error approachin order to be able mentalmedia(soil,water,and the atmosphere),and living to proceeddirectlyto the accounting stage. organisms (such as animalsor plants) An AccountingSystem for NaturalAssets: * A set of ecosystems,that is, relationshipsbetween FrenchPatrimony Accounts components within specific systems (such as forests, groves,heaths,grasslands,wet areas, and coastal ecosys- Despite the diversityof availabledata, there was no tems) instrument through whichthe conditions of the long-ter-m * A set of territories, that is, spacesdelineatedeither regeneration of nature couldbe taken into accountwithin geographically (such as mountainsor coastalland), insti- the overallframework of economicdevelopment. For this tutionally,or abstractly(suchas gridsor observation net- reason, in 1978France decidedto designan accounting works). systemto assess both quantitatively and qualitatively the Naturally,these groupsare not analyzedseparately, but state and the development of the natural patrimony,as in terms of their relationships with other natural compo- wellas the causesand effectsof its evolution. The author- nents (hence the importanceof the conceptsof ecosys- itiesopted to establishaccountsexpressedin both physi- tems and cycles)and, most important,with humanactiv- cal and monetaryunits, whichwouldbe independentof ities. The abovecategoriesare henceforthsupplemented nationalaccountsbut connectedto them byvariouslinks. by the categoryof "agent" (individualsor institutions Underlying the conceptof an environmental accounting usingthe natural environment) and a summaryclassifica- Accounting Environmental in Development Policy:TheFrenchExperience 43 Table 7-1. Structure of a Central Account for a Resource Component Initial Potential Development Available Harvestingand Othereffectsof human Final category stock Increase resource restitution resource extraction activities(pollution) stock 1 2 3 4 N Total tion of the relationship between people and nature, such The rigor of an accounting approach. Patrimony ac- as extraction, pollution, nondestructive use cf the envi- counts do not purport to be an organized and periodical ronment, access, land use planning, development, and inventory of information alone, as are, for example, re- selection. For obvious reasons, the categories chosen for ports on the state of the environment. As already indi- agent accounts are derived from those used in national cated, they represent a commitment to the notion that accounting systems (such as business firms, households, the relationship between people and their environment government services, and foreign firms or entities). can be effectivelyportrayed in accounting terms. Compared with similar experiments, the most original This concept first appears in the systematic construc- feature of French patrimony accounts is that the natural tion of an account for each component, such as raw environment is analyzed according to each of its basic materials, the physical environment, living organisms, and functions: economic, ecological, and social. This func- ecosystems. This account describes the available stock of tional approach is in fact essential when it comes to the component at the beginning and end of a given period revealing natural potential and qualitative damages result- (initial and final stock), as well as the factors that may ing from market and nonmarket activities. It explains to have brought about any changes: increases or decreases a large extent why patrimony accounts have been devel- in stock from natural causes and the destruction or de- oped independently from national accounts; the main ob- velopment caused by humanity. Such an account, called jective is to demonstrate not a net profit or loss from the the central account, is an itemized balance sheet (see exploitation of nature, but tradeoffs between the eco- Table 7-1 and a practical example in Table 7-2). nomic, ecological, and social functions of natural re- One of the advantages of the accounting approach is sources. Nomenclatures of the French Natural Patrimony that the coherent picture it offers accurately reflects the Accounts are given in the appendix to this chapter. loops and relations. In theory, each change in one part of Table 7-2. Example of a Central Account: Growing Stock of a Commercial Forest, 1969 to 1979 (thousandsof cubic meters) Resource/asset Broadleaf Coniferous Total Use Broadleaf Coniferous Total Volume of growing stock 980.1 6,526.5 7,506.6 Natural reduction 5.6 21.0 26.6 in 1969 (mortality) Natural growth of initial 401.9 2,583.5 2,985.4 Accidental reduction 9.7 481.2 490.9 stock (breakage and windfall) Natural growth by Resource extraction 92.0 1,474.0 1,566.0 reproduction (commercialfelling) (recruitment) Self-consumption 13.6 395.0 408.6 Adjustment -29.4 +1,239.2 1,209.8 Volumeof growing stock 1,330.7 5,758.0 7,088.7 in 1979 Total 1,422.2 9,368.4 10,790.6 Total 1,422.2 9,368.4 10,790.6 44 Theys Jacques the accounting systemshouldproducean equivalent change dard nationalaccountsand deal with economicand non- in accounting terms.This interactionis most clearlyilus- economicactivities. trated in the ecologicalsector accounts and linkage ac- In the future these accountswillmost likelybe supple- counts, whichanalyze betweennature and the relationship mented by,and connectedwith,social statistics. the components, and agent accounts,whichsum up the The flexibility of the French system makes patrimony linkages with the natural environment of a given agent accounts resemble more of a general framework than a An objectiveof the central accounts is to aggregate rigidsystemof accounts.This flexibilityenablesresource data to the extent possible.At first glance,this objective managersto remaindirectlyinvolved in constructing such wouldseem to contradictthe use of highlydifferentiated accounts. This has been the case in France, where re- physicalunits of measurement(suchas surfacearea, cu- search into methodologyat the central level has been bic metersof wood, numberof species,and tons of coal) combined with highlydecentralizedpracticalinitiatives. indicators.This obstacleis partiallyover- or of qualitative come by creating equivalentclasses at the assessment The roleof economicassessment. Thosefor whomthe level accordingto three main functions:economic,eco- word "accounts"first signifiesa monetarybalance sheet logical,and social. This method can be applied using (or a cost-benefitanalysis)could be disappointedby the monetaryunits wherejustified,but also energyand bio- French approachto patrimony accounting,whichconcen- massequivalents whenpossible.Although this systemhas trates on physicaldata. In fact, these economicconsider- attempted to produce aggregatedata, the concept of a single natural patrimonydevelopmentindicator-similar ations appearon at least three levels. to the majoraggregates used in nationalaccounting (such * The systemis designedto lay the groundworkfor a as GNP)-has been abandoned. genuinephysical or "bio-economy." The questionat hand is to revealthe relationbetween the economicand non- Flexible applicationof the framework. The develop- economicfunctions of nature, to analyze the circum- ment of central accounts must take into account the stances in whichthese functionsare reproduced,and to specificityand complexity of natural phenomena. The determinehow certain underdeveloped natural potential limitationsof an aggregateapproach havealready been maybe transformedinto productionfactors. In a word, shown:in practice it is neither possibleto combinethe patrimonyaccountingis a key tool in assessingthe eco- indicatorsrepresentingeach of the three main functions logicalbuildingblocksof development and is a represen- nor to comparethe measurements specificto extremely tation of the conceptof sustainablegrowth. dissimilar categoriesof resources(for example,forestar- * Patrimony accountsalso havemany links or bridges eas and watervolume). Thus, differentaccountsfor each with the national accounting system. Agent accounts, of these three functionswere created, and data were whichuse categoriesborrowedfrom patrimonyaccounts, aggregated onlyfor the mainresourcecategories(suchas serve as a system of passageways through which it is water,fauna,flora, and atmosphere).Consequently, vec- possibleto movefrom classicproduction and consump- tors, not indicators,must be used. Similarly, the objec- tion activitiesto changesin resource stocks or environ- tives of thoroughness and systems impact accounting mentalquality(or viceversa), as shownin Figure 7-2. In wouldbe too costlyto use if they were applied to the .. letter. For this reason it was initiallydecidedto confine adionacutsrodexniuesmetoepr letter.For this reason it was initiallydecidedto confine and developthe natural environment (satelliteaccounts). the analysisto a fewprioritysectors (forests,water,soil, * Last, but not least, it must be rememberedthat the landuse, and anduse, land wildlife) wildlife)and a and a few basicinteractions. fewbasicinteractions.very purpose of such accounts is to estimate simultane- Becausethe phenomenato be measuredare so heter- ously the ecological,social, and economicvalue of the ogeneous, the principleof standardization has been par- natural patrimony.This involves,on the one hand, not tiallyreassessedin favor of differentiating between com- only assessingthe environmental stock, but also tracing ponent,ecozone,and agent accounts. the damaging effectof its conversion. On the other hand, * Componentaccounts deal with subsoil assets, the it involves evaluatingthe extensionof services rendered soil, the atmosphere,water, and the flora and fauna. by nature. The entire systemis organizedwith reference Materialor energybalancesare presented at the begin- to this objective: priority is given to a functional ap- ningor the end of a periodand indicatechangesresulting proach, qualitative assessmentsare introducedfollowing fromnature or humanactivity. physicalanalysis,and aggregateindexesare sought. * Ecozone accounts register the changes in land use Ecoze and stacusfcoutsyster. R othe hangesingla oduse Thisbeing the case,manyproblemsremainunresolved, and the status of ecosystems. Remote sensing methosds patcual in th il fmntr sesetpno etablih are thee neessar to accunts.particularly in the field of monetary assessment. Opinion nto Arenecssary establishthpes acunts humaninstit ple is divided,especiallywith respect to the most suitable ac cuntsideal Agent,which andgor f thua winthpeople istiu- methodof assigningan economic valueto resourcestocks: whichare classified tions, in the categoriesofthestan- usingmarket prices, consideringthe discountedvalueof Accounting Environmental Policy: in Development Experience 45 TheFrench Figure 7-2. Links between Economic, Agent, fromthe environment and the damagesborne by it. Nor- and Patrimony Accounts wegianresource accounting,however,is based on an and materialbalance.This system analysisof eco-energy activities Economic translates economic activity into flows of matter to energy National accounts Input-output and viceversa.The Canadianapproachdrawsheavily on economic the concept of impact studies and applies them at a accounts Production Consumption macroeconomic level.This approachis concernedprimar- ily withthe dynamicof ecologicalsystemsthat havebeen Uses , t Resources disturbed by the economic system. Typology of relations ____ _ The experience of the Netherlands hinges on the neces- Agent beTvpology of relations _ Noneconomic sity of harmonizingthe economic,social, and ecological accounts Social 4 activities functionsof nature. The French patrimonyaccounts,al- Extractio Accretion uses, though based on this conceptof function,share with the Pollution and and such Norwegian accountsthe aim of attaininga genuineecon- depletion development as access' omyof wealthbasedon an assessment of the potentialities Impacts t (bothmonetary and nonmonetary) of usingnaturalassets. The approachespursued by differentcountries reflect in resource PatrimonyChanges stocksseeaplnigccrsadobctv. accounts and environmental quality several plannng concems and objectives. * To diagnosethe current (or foreseeable) state of the environment (Canada,France,and Norway) * To analyzethe effect of environmental policies (or total anticipatedrevenuesand services,or even rneasur- the absencethereof)on economicperformanceand wel- ing opportunity or replacementcosts. All of these ap- fare (Japanand UnitedStates) proaches yielddifferentresults, and it is clear that this * To assess the value of resources that can be ex- subjecthas not yet been fullythought out. ploited for development as wellas the conditionsof their Despite the seeming complexityof the F'ren,chap- regeneration(Franceand Norway) proach, tangibleresultshavebeen obtainedover a fairly * To identifythe possibleoptions among the social, short period and at a relatively low cost (three staff-years economic, and ecological objectivesof development, with and $100,000 in research grants) by focusingattention a viewto globalnegotiation (France and Netherlands). on a limited number of areas (water,forestry,soil, and In conclusion, no natural resourceaccountingeffortso wildlife)and by decentralizingthe data gatheringprocess. far has madeit possibleto attain all of these goalssimul- Additional yearsof studywillbe requiredto translatethe taneouslyor to coverthe entire range of planningpro- resultsof patrimony accountinginto changesin the rela- cesses(as illustratedin Figure 7-3).Moreover,it is diffi- tive price structure of natural resourcesand into mone- cult to imagine a systemcapable of meetingthe needs of tary values.Therefore,in the immediate future, the pri- economists, ecologists,the public, decisionmakers,and ority has been given to using componentaccounts in environmental managersall at the same time. Developing long-term modelingand to buildingecological sector ac- countriesmay thus haveto choose from the variouspos- countsthroughremotesensing. sible approachesby referringto their own needs,levelof development, and environmental management problems. The Experience of Franceand OtherDeveloped This is discussedbelow. Countries:A Comparisonof Planning Objectives Adapting Environmental Accounts As a conclusion to the firstpart of thischaptsr, it would to Developing Countries be interestingto situatethe Frenchexperiencein relation to the general trend of establishing environmental infor- It is no coincidencethat proposals currentlyput for- mation systemsand to compare the variousapproaches ward about environmental accounting are varied. This adoptedin the lightof planningobjectives. On examining heterogeneitysimplyreflects the varied political con- some of the more representative projects, one is struck structures,and problemsin the devel- cerns, institutional Each countryseemsto haveadaptedits by their diversity. of findinga oped countries.It also indicatesthe difficulty environmental accountsto its own national needs, insti- consensuson a theoreticalframework that wouldpresent tutions,and culture. clearlythe complexrelation between the economyand Americanand Japaneseproposalsare clearlybased on the environment. Therefore,a case-by-case, country-by- the theory of welfareeconomics:their aim is to modify country, and perhaps even region-by-region analysis is GNPby assessingin monetaryterms the servicesderived calledfor, based on a simplifiedaccountingframework. 46 JacquesTheys Figure 7-3. Environmental Accounts and Economic Planning Potentialities Activities Impacts Accumulation or depletion Environmental Direct use of goodsand goodsand Useof gods Outputan d services of Impact Mobilizable Inpt Nonmarket Market service (consumption)o potentials production produiction activities * Human * Economic * Nature * Ecological * Movable assets Imports . _ Social and currency Waste, Absorption * Realand pollution of pollutants On goods capital * People 9 Nature Resourcefunctions * Movableand * Economic I \ real goods * Ecological _ . Available Useof * Institutions * Social * publicservices, publicservices and negative) (positive including Public environmental management services 1 Policies * Plans • Projects o r Incentives 9~~~~~~~ Criea and standards evu mxmie0Output Obetie O b j 'ective: maximize weath-*a goals and social,economic, |Long-termchoie|| Social | discountrate values l whileothers measurethe effectsof environmental Someaccountsassessthe potentialand stockof resources(suchas in Franceand Norway), iVote: damage (suchas in Canadaand the UnitedStates). or improvement Problems Specific to the Developing World that directly affect environmental accounts. First, most people are aware of the critical role that natural resources The first question that naturally comes to mind is the continue to play in the economic activity of developing applicabilityof environmental accounting in the context countries at all levels (employment, production, export, of the physical problems experienced by the developing and consumption). Most developing countries-particu- countries. It is clear, however,that such accounts will not larly the poorest-depend on the export of primary com- be created unless they correspond to a perceived eco- modities or one or two other products for their growth. nomic need. Resource regeneration and improvement is thus a vital factor in these economies. Economic issues and their implications. Despite the Second, the importance of natural resources is made enormous diversity of structures and economic situations even more apparent if nonmarket activities are consid- in the developing world, there are a few common features ered. Another feature of developing countries is the exis- Accounting Environmental Policy: in Development TheFrench Experience 47 tence of a traditionalsector, dominatedby nonremuner- * Because of the highlypolarized nature of develop- ated activities including self-production,self-consumption, ment,many cases maywellwarrantlimitingthe environ- and barter, alongsidea modern sector, whichis highly mentalaccounting systemto an analysisof a fewproduc- integratedinto the internationaltrade system.To date, tion and consumption channelsor primarycommodities. populationgrowth and the frequent choice of capital- intensivetechnologyhave limitedthe capacity of these Physicalproblemsand their implications.It wouldbe countriesto absorb the modern sector. inappropriate here to providea detailedinventoryof the It is thereforethe properfunctioning of this traditional environmentalproblemsin the developingworld. It is sector (for example,accessibility of local,nonreplaceable more importantto summarize howthese problemsdiffer resources)that ensures the basic survival of hundredsof fromthose experiencedin the industrialcountries.Envi- millionsof people. The clearest exampleis noncommer- ronmental concernsin the developedcountrieshave fo- cialenergysources(such as firewoodand refise), which cused largelyon pollutionrisks and the conservation of accountfor 50 percent of the developing world'senergy the naturalenvironment. But despiteextensive localdam- consumption. In the People's Republicof the Congo,for age caused by uncheckedindustrialization or urban ex- example,firewoodrepresents 80 percent of all energy pansion,the greatest environmental threat in developing sources and takes up 25 percent of householdbudgets. countries is the disappearance of the resource base on During the past decade, its price for villageinhabitants which the survivalof millionsof people depends. The has increasedtenfold. problemsrelated to resources include shortages of fire- Third,this superposition in of heterogeneous economic wood and deforestation,deteriorationof arableland and systemstranslates directlyinto an enormoussocial and desertification, depletionof the quality and quantity of geographicalinequality.Public works projects, recently water and the prevalence of waterbornediseases,reduc- constructed modernindustrial complexes, and rapid urban tion in geneticdiversity and wildlifestock (wildand do- expansionare so many enclavesof modernity,whichat mesticated, including fishing resources), and damage times stand in strong contrastto the rest of the country. causedby natural disasters. The growing in income,consumption disparities patterns, These problemstend to overlapinto a chain of cause and lifestylescall into question the usefulnessof tradi- and effect, which makes partial approaches of limited tionalstatisticalassessment methodsbasedon averages. value. Disturbancesin the hydrauliccycle,for example, A finalfactor specificto developing-country economies may be related to erosion, which is in turn linked to is their dependenceon the outsideworld. This has also deforestation.The destabilizationof ecologicalsystems had considerableinfluenceon the introdLiction of envi- mayalso be linkedto povertyand inequality, the popula- ronmentalaccounts.On the one hand, the importanceof tion explosion, legal systems,dependencyon the outside export goods, whosevalue is often set by the interna- world,and adversenatural conditions. tional market, and, on the other hand, the weaknessof This situationhas severalimplications for establishing sectors producing directly for the domestic market, accounts. sharplyreduce the effectiveness of national rnechanisms reuatn reouc supl ademn. FutemoeX The stock of natural resources and its development reuatn reouc sppl an deman. F .rhroe take precedence over pollution problems in developing given the spread of the nonmarket sector, it is obvious uteriec vr that, in this situation,prices cannotfulfilltheir traditional countries. role as indicatorsof scarcity. * An accounting system will be even more advanta- Theeas Thnere s ipslcar arseveral are so implications of t these economic Issues geous if it reflects the systems' effects and cyclical phe- for environmental accounting. nomena. * Although the nomenclature of natural resources * There is no doubt that the assessmentand develop- seemseasilyadaptableto the specificcontextof develop- ment of natural resource potential can have both an eco- ing countries, the categorization of agents should be care- nomic and ecologicalinterest for developingcountries, and, if necessary, fullyreviewed revised. providedthat it leads to the formulationof aggregate indicatorsand coversboth commercial and noncommer- AvailableInformation cial resources(see also Peskin,Chapter10). * Giventhe poor representativenessof monetary as- The high cost of compiling new data and the chronic sessments,it is necessary,at least initially, to concentrate lack of qualifiedpersonnelin the combinedfieldsof sta- on physicalaccounting. tisticsand the environmentmake it difficultin the short * The existence of extreme inequalitiesor different term to prepare resource accounts in developingcoun- situationsrequiresthe creation of separate accountsfor tries. Gatheringinformationon the environment is gen- each homogeneousgeographic region or population erallynot yet a priorityconcern for statisticiansin these group. countries. In these circumstances,it is thereforelikely 48 JacquesTheys that environmental accountingwillin the short term ei- marginalsettlementsin rural or urban areas. Generally ther be based on existingdata alone or depend on statis- speaking,existingdata are often not sufficientlylocalized tical programs already envisagedin other fields. This and are discontinuous or isolated.Once again, they are restrictionmakesit strategicto establisha preciseinven- gatheredby a host of independentagencies,whichfail to tory of all currentlyavailabledata (mapping,scientific, circulatetheir findingsamongthemselves. and statistical). In general,there is little data availableon stocks and In 1977 the United Nations Office of Statistics ad- even less on their growthor depletion.Assessments of dresseditselfto this taskby undertakinga generalsurvey natural resource potential are generallydealt with in ad of 122 countriesand case studieson Kenya,the Domini- hoc studiesor research,such as those carried out before can Republic, and the FijiIslands(UnitedNations1982). a major project is implemented.Purely economicesti- The main problemsfound were dispersedand compart- mates most often remain confinedto the university(at mentalized data, insufficientspecific information,ex- least at a global level),and studiessummingup environ- tremely uneven quality of nonspecificdata, and over- mental expenditureat the national level are extremely general statistics prepared by international agencies. rare. Finally-and most significant-qualitative data are Theseare discussedbelowin turn. virtuallynonexistent. Dispersed and compartmentalized data. Somedata on Unevenquality of nonspecificdata: abundant but not the environment already exist in the developingworld. directlyusable. The observation aboveleads to a simple These data, however, havebeen compiledby a widevari- conclusion: the feasibilityof environmental accountingin ety of differentagencies,ministries,scientificinstitutes, developing countrieswilldependprimarilyon the ability business firms,and internationalorganizationsand are to adapt data originallycompiledfor other purposes or scattered and diversified. Usuallyappearingas by-prod- to use existingstatisticalinfrastructuresto gather infor- ucts of research studies, sectorial surveys,and project mation from other sources.In most countries periodical evaluations, they are presented in diverseforms, such as statistics are availableon population;employmentand individualobservationson specificsituations,statistical output, by major sector of activity; land area under agri- series, files, and maps. Most often used directlyby the culture,agricultural yields,and production;livestock, fer- institutionsproducingthem, these data are neither stan- tilizer and pesticides;quantityof timber and forestprod- dardized, centralized,nor even widelydisseminatedor ucts for export; catches of fish; and construction of published.Thus in Thailand,more than eighty different permanentdwellings. bodiesproduceenvironmental data, whichuse frequently Through a few relativelysimple operations, such as incompatible nomenclatures and formats.Forty-five such geographiccoding of data or the use of other data (for institutions existin Kenyaand thirty-eight in Fiji. example,pollution coefficientsor resource-use coeffi- Althoughconsiderable potential does exist, it remains cients per unit of output), statistics directly usable for largelyundeveloped. In this connection,the creation of environmental accounts mightbe obtained, and an envi- an environmental or resource account could representa ronmentalsectioncould gradually be added to some sur- decisive step forward,evenif it werelimitedto creatinga veys. minimumof harmonization-and thus economies of Naturally, the successof patrimonyaccounts depends scale-betweencompetingdata systemsand to servingas on the qualityof their connection with the SNA, whichhas a meetinggroundwheredata producersand users-who the tremendousadvantage of havinga homogeneous and otherwise havelittle contact-could meet. consistentframework and of being appraisedannuallyin most countries.Nationalaccountingis a necessarytran- Insufficientspecificdata. Some progressin collecting sitionpoint, particularly if environmental accountsare to data has been made duringthe past years.Severalcoun- be used in national economicplanning. There are two tries nowpublishreports on the state of the environment. limitations to this approach,however. Monitoring networkshavebeen established to analyzeair First, it is clear that considerablegaps exist in the and waterpollutionfroma fewstandpoints.Remotesens- statistical material compiled-even at the purely eco- ing is now being used systematically to observechanges nomiclevel.For example,verylittleaggregateddata exist in soiluse. At the instigationof the Economic and Social on householdspendingand consumptionor on income Commission for Asiaand the Pacific,pertinent data have distribution, and information relatingto volume(deflated been collectedin most Asian countrieson deforestation accordingto a price index) is often contestable(IARIW- and water resources (ESCAP 1982). These efforts, how- ECA 1982). ever,remain the exception.In Kenya,for example,which Second, it is obviousthat the significance of accounts is one of the more advanced Africancountries,statistical and the use of aggregatesas overallindexes of activity data are still inadequateon such importantphenomena are considerably reduced by the fact that they do not as deforestation, air and waterpollution,soilerosion,and include nonmarketgoods and services. Gunnar Myrdal Environmental Accounting in Development Policy:TheFrenchExperience 49 (1970) pointed out long ago the limitations of applying comprises only 400 stations for the entire world, which the notion of GNPto developing countries whose econo- represents an average of only 2 to 4 in each country. Last mies include sizable nonmonetary agricultural sectors. but not least, entire sections of environmental concerns These two limitationsexplain why the quality of aggre- have poor or inadequate data coverage; this is especially gate data collected can vary considerably. In Africa, for true of wildlifeand flora and of environmental economics. example, estimates of GNP growth during 1960 to 1970 ranged, according to the sources and countries concerned, Environmental Accounting as a Tool from 1 to 11 percent for Chad, from 1 to 13 percent for for Policymaking Mali, from 1 to 6 percent for Burkina Faso, and from 1 to 2 percent for Senegal (World Bank 1981). These gaps, Natural resource accounting could act as a catalyst for which may at first seem to represent insurmountableobsta- framing environmental policy in developing countries. cles to creating environmentalaccounts, can also, paradox- Many of these countries have complained that it is diffi- ically, be viewed as significant opportunities. As pointed cult to put the concept of integrated development into out on numerous occasions, improvingthe quality of con- practice without a tool to facilitate the distribution of ventional economic data systems (national accounting, in investment to various areas of the environment or to particular) will obviously benefit enviromnental accounts identify beforehand the payers and beneficiaries of the by emphasizing the nonmonetary sector. policies envisaged. To a large extent, environmental ac- Two examples-among many others-exist of this con- counting answers this dual need. In this respect, it can vergence. First, by excluding wood-based fuels, current fulfill, at the national level, the same role of initiator or statistics obscure the specific nature of the energy crisis in driving force that impact studies have at the project level. the developingcountries and may lead to irrational invest- It can supply environmental institutions with the means ment decisions. In Zaire, for instance, if noncommercial to open dialogue with economic administrators and mem- energy sources were included, energy consumption would bers of the scientific community.It can also provide these jump from 3 to 10 percent of gross domestic product same institutions with effective management tools in their (GDP). Second, because of the quality of data compiled on particular field of competence, such as priority criteria nonmarket food crops, Kenya was able to lorecast harvest and minimal data on anticipated expenditure and its im- yields that proved to be invaluable during the drought in pact. Environmental accounting cannot, of course, substi- the late 1970s. A project specificallyaimed at collecting tute for political will, but, for environmental administra- data on natural resources not intended for export markets tions, which are often weak, it can constitute a powerful could thus easily become economicallyprofitable. means of internal structuring and recognition with re- Abundant but overgeneral data from inzternationalor- spect to other ministerial offices. ganizations. Beginning in the mid-1970s, many interna- tional organizations-including the Food and Agriculture Proposals Organization (FAO); Unesco Man and the Biosphere Pro- gram; the World Health Organization (WHO); and the The preceding survey shows that the development of U.N. Environment Programme (uNEP)--have involved environmental accounting in the developing world will themselves in far-reaching programs to compile data on inevitablyencounter a set of serious obstacles. The prob- the environment and natural resources. lem of insufficient and poorly dispersed basic data is For example, the FAO recently completed a soil map on compounded by several factors. a scale of 1:1.5 million, as well as a map of areas in the * The shortage of financial and human resources that process of desertification. It has also launched a project can be mobilized in the light of other, more urgent, to partition Africa and Asia into homogerneousecological priorities for statistical data that have not yet been filled. regions and has analyzed soil potential for twelve types of * The lack of a coordinating structure capable of crops (UNEP 1981). It periodically dissenninates data on bringing together multidisciplinaryteams. soil use (in five categories), pesticide use, area of land * The unsuitability of a cost-benefit approach in sec- under irrigation, and fishing yields. Two years ago, it tors dominated by nonmarket activities. completed an inventory of tropical forests and their * The present lack of political demand for this type of growth, in conjunction with Unesco and UtNEP. tool, particularly by economic planning bodies. For its part, UNEP has coordinated a monitoring net- work to oversee climate, long-range transport of pollut- Although these obstacles may seem sizable, they are ants, environmentalhealth, oceans, and terrestrial natural not insurmountable. There are a few factors that might resources (GEMS program). In many fields, these data are help in establishing environmental accounts, and results often the only available at the moment. The pollution from the few projects recently undertaken in developing monitoring network coordinated by the GEMS program countries have been encouraging. 50 Jacques Theys Severalfactorscan possibly facilitatethe setting up of * In the poorest countries,priorityshouldbe givento environmental accountsin the developing countries:their preparing reports on the state of the environment(add- environmental problemsmaybe more apparentthan in ing, where appropriate,a survey of investment expendi- the industrialcountries,the convergence of requirements ture). for economicand resource statisticsmay be more obvi- * Patrimonyaccountsshouldbe developed only in the ous, and the intermediatematerials and results of the economically most advanced countries and should em- developed countriescan be used. phasizeaccountingin physicalterms before contemplat- In addition,remote sensing is an effective, well-devel- ing linkageswiththe SNA. oped tool. It is particularlywell adapted to evaluating * Data collection and processingshould initially focus naturalresources, and, havingdemonstrated its reliability, on one or two resources regarded as economically and remotesensingcan be an extremely usefultool in creat- ecologicallystrategicby each country. ing environmental accounts. * The national (macro)and regional(major projects) inexpensive * It is relatively compared withother meth- approaches shouldbe combinedas far as possiblewithin ods of statistical and cartographical 3 analysis. the framework of flexibleand decentralizedinstitutional * Its globaland composite nature allowit to analyzea machinery, whichwilldrawmaximumbenefit from exist- large numberof variablessimultaneously, thus furnishing ing skillsand information. qualitative results. as wellas quantitative At the InternationalLevel * It makes it possible to process rapidly large and inaccessible areas.4 As was the case whenthe SNA wasestablished,interna- * It is particularlysuitablefor repeated use, whichis tional cooperationwillundoubtedly be necessaryto help importantin takingperiodicmeasurements of differences initiate the process of creating environmental accounts. in the state of the environment. The following six proposalsfall withinthat context. To date, there are no examples of natural r esource * A detailedsurveyshouldbe madeof the cost, logis- accounting projectscarried through to completionin de- tics, human resource requirements,and performanceof veloping countries.However, significantprogresshas been accountingsystemsbeing set up in the developed coun- madewiththe launching of a fewpartialeffortsunder the tries. At the same time, an audit on the reliabilityof auspicesof the U.N.StatisticalOffice(uNso),UNEP, and remotesensingmethodscould be carried out. EScAP, and on the initiative of individual 5 countries. * Full-scaleexperimentsshould be funded in a few Cote d'Ivoireis a good example,as it began research countries(one per continent),whichfocuseach time on in 1983 with a view to setting up a quantitativeand a differentaspect that is locallyconsideredto haveprior- qualitative soilaccount (Dravieand others 1983).Within ity. a few months,it establisheda methodological framework * Specificimprovements in existingstatisticalsystems and appliedit to a smallregion,whichpermittedfull-scale should be promotedunder the auspicesof the U.N. Sta- activitiesto be carried out in three directions. tistical Office,such as reorganizingdata according to First, a dual soil classification system(functionaland ecological zoningpatterns, compiling economicdata per- qualitative) was created. Second, a central account was taining to environmentalmanagementin a single com- set up, whichdescribedboth the changesin land alloca- pendium, or adding a section on the environmentor tion and the evolutionof its potentialuse by phenomena natural resourcesto industrialand agricultural surveys. such as erosion, desertification, and certain agricultural * An internationalnetwork should be establishedto practices.Third, an economicaccount was established, facilitatethe disseminationof the results of successful whichcoveredboth the investment cost involved in soil experiments, the exchangeof viewsand intermediatema- protectionand improvement and the monetaryeffect of terials, access to data collectedby internationalorgani- the growthof potentiallyexploitableassets (taking into zations,and the creationof a file of cost-benefit studies. account theories on production techniques).Full-scale * Trainingprogramsshouldbe developed for the stat- compilation of statistics for these accounts must, of isticians,economists,and scientists involvedin the ac- course, be started before any conclusions maybe drawn countingsystemsprocess,or trainingmodulesshould be fromthis project. createdto make national accountantsand planning offi- cialsmore aware of the importanceof environmental ac- counting. At the National Level Conclusion: Towarda Programof Action The preparationof accounts cannot be contemplated withoutstrong motivationon the part of the interested Actually,the greatestproblem connectedwith environ- countries. mental accountingis not to define once and for all a Accounting Environmental Policy:TheFrenchExperience inDevelopment 51 model transposableto all the developingzountries,but willbe possibleto attain all these objectives within two to launch a process of implementation that takes into years. accountthe assets and constraintsspecific t:oeach one of them. It is thus necessaryto go beyonda list of desirable SecondStage: Development activitiesand to propose a program with very specific stagesand time scales. The second stage should havetwo objectives:on the The following program proposes a series of steps in one hand, to extend the precedingsteps so as to include three stages(short-,medium-, and long-term),whosemain fewereconomicaspectsand, on the other hand, to set up aim is graduallyto arouse in the developingcountries the essentialinstitutionalstructuresin each countrycon- concerned sufficientmotivationto proceed to the final cemed. The expertsshouldthus be graduallyreplacedby stage of creatingaccounts. nationalbodies. activitiescould thus be carried out dur- The following First Stage:Awareness and Experimenta,tion hsseodsae n this ing second stage. The aim of the firststage is to interestplanningofficials * The setting up, in each of the countries in whicha (and beyondthem, politicaldecisionmakers) in creating pilot studywasdone, of institutionalstructuresresponsi- accounts as soon as possible.The stress is thus deliber- ble for the accounts(Figure7-4). ately placed on producing results rapidlyand on using accountsfor economicforecasting. For that purpose four or five pilot studies should be Figure 7-4. Using Accounts to Compare Projects launched, with the participationof experts from these or AlternativeDevelopmentScenarios countries and from the developedcountries who have experiencewith environmental accounting.Initiallyeach andsustainability Value study would prepare a central account (stock account) ofthe project for one of the resourcesconsideredto be strategicby the volunteer countries (such as water, forest:,soil, humid , zones,fisheries,or genotype). The first drafts of the accounts thus created are used Ecological Social Economic in the second stage to analyzeresource processingnet- evaluation evaluation evaluation works throughout the production system and to assess the modifications in the economicvalueof the stock at the beginning and the end of the period under consider- Ecological Social ation.It willbe possibleto test severalmethodsof mone- of function function tary evaluationconcurrently. natural (nonmarket) The best wayof turning the precedinginformation to resources account would be to construct in a third stage, together with planning officials, two contrasting resource manage- Gainor loss Economic ment scenarios. One of these would prolong past trends, of function function while the second would be a conservation scenario. This of stocks Consumption prospective analysis would illustrate by simple indicators Amountof stocks * Imports the relevance-both from the economic and physical view- in t, t + 1, t + n * Exports Expenditures points-of a strategy of sustainable development.The case (quantity and quality) Jobs protection studies would also localize existing information and as- I J p/ sess the cost and technical conditions involved in obtain- Resourceflows / ing currently unavailable data. By the end of the first Macroeconomic stage, the experts should thus be able tD propose an model initial program for organizing the existing environmental / data in each country. Finally,at the same time as this fieldworkis being done, - Usesand _ t_ it would appear to be essential to maintain or to set up Patrimony extraction National Satellite an ad hoc assessment team. This team would be respon- accounts of resource accounts sible for periodically following the progress of the case studies and for assessing the results of this first stage, Scenarios together with the national leaders. The few rare experi- and projects ments that have already been highlighted indicate that it (Prospectivemodels) 52 Jacques Theys * The preparationof a complete systemof accountson * Development, where possible, of prospective and the resourcesstudiedduringthe firststage. This is equiv- macroeconomic modelsfor assessing,on the one hand, alent to addingto the preceding analysisa satelliteac- the economiceffects of environmental policies and, on count summingup the expenditureon the management the other hand, the consequences for the mainecological of this resource,a set of agent accounts,and, in particu- indicatorsof differentgrowthscenarios lar, the bulk of the data on the ecologicalfunctionof the * Launching,on the basis of the preceding informa- resources(accountsand indicatorsof defectsin ecosys- tion, of a limitednumber of cost-benefit studies on poli- tems). This wouldbe done by the institutional structures cies for combatingconditionssuch as desertification, de- describedabove. forestation, and water pollution (in accordance with * The launchingof international trainingand research nationalpriorities). activities. At the end of this period four or five complete ac- In the othercountriesor on an international level counts, each dealing with a specificresource (such as water,soil, or forest),wouldthus be available. This should * Preparationof an international-level typicalaccount sufficeto test the validityof the indicators,ratios, or units structure adaptedto the developing countriesand of the of economicand ecologicalmeasurementsuggestedin corresponding methodological documents,such as guide- eachcase. linesand intermediatematerial Concurrently with this detailedanalysisof a resource, * Adoption of an internationalclassification systemfor it would probablybe desirableto use the availabledata resources (such as water, air, soil, and ecosystems) and to set up in four or fivevolunteercountriesa provisional effortsto harmonizeexistingnomenclatures systemof indicatorsof situationor of resultsfor the other * Improvement of the methodsof storing and dissemi- nationalresources.Allthis materialshould finallyenable nating the data collectedby the internationalagenciesto an increasingnumber of countriesto become aware of make them more coherent and directlyaccessible to the the relevanceof accounts before the third stage, which developing countries should consist of applying the pilot experimentson a * Launching of a majorinternationalresearchprogram largescale. on indicatorsof defectsin ecosystems(analysis of thresh- olds) and on resource economics(economicassessment Third Stage:Dissemination of damage,calculation of shadowprices, and criteria for the interperiodmanagement of renewableand nonrenew- Untilthe programis about to enter its fifthyear,it will able resources).This researchfocuseson the problemsof not be possibleto appreciatethe relevance and feasibility the developing world and willhave to take explicitly into of environmental accounting in the developing worldand accountthe nature of the available information. to arrive at seriousconclusions regardingthe accounting In conclusion,it is necessaryto revert to another as- structurebest adaptedto the situationin these countries. pect, the institutionaldimension.It seems obviousthat The third stage should thus logicallybegin with an inter- an operation as demandingas the creation of accounts nationalconference to assessand adjustthe programof has no chance of succeedingunless it corresponds,at action.The following long-term actionscouldeventually be leastto beginwith,to specific politicalneeds withrespect launched, depending upon the resultsof this conference. to management,and unless it givesbirth to a permanent framework for dialoguebetweenthe responsiblegovern- In countriesthat initiatedpilot experimentsduringthe ment departments,scientists,economists,planners, and firsttwo stages statisticians.Methodological problemsare of secondary * Progressive extensionof accounts establishedfor a importancecomparedwith these necessities. single resource to the totality of the natural resources (patrimonyaccounts) and of the expenditureon their Appendix. Nomenclaturesof the French Natural management (satelliteaccounts) Patrimony Accounts * Simultaneousorganizationof existing information systems(such as data banks, monitoringnetworks,sur- A. Nomenclature of components veys,and inventories) 1. Nonrenewable components * Introduction in planning of a limitednumber of ag- Fossilfuels gregate indicators of the state and developmentof re- Uranium sources, whichare followedup periodically(and estab- Metalliferous ore lishedon the basis of the accounts) Nonmetallic ore * Discriminatinganalysisof the possible linkups be- Quarry(including sand) tweenresourceaccountsand nationalaccounts Other Environmental Accounting in Development Policy:TheFrenchExperience 53 2. Environmental media in monetaryterms all stock or capital goods held by eco- Soils (exposed and immerged) nomicagents(such as housing,capitalequipment,land, sub- Continental waters (surface water, groundwater, soil resources, livestock,and forests) as well as financial snow, and glaciers) assets (such as gold, currency, and stock). Ocean waters (coastal waters and open sea) 3. For Landsat,the taking, processing, interpretation,and dis- Atmosphere (air, upper atmosphere, and play of imageson a scale of 1:100,000costs roughlyone climate) tenth of photomapping usingcolor infrared. 3. Living organisms 4. For example, only40 Landsatimageswere neededto estab- Animal species (wild and domestic)-according lish a 1982-83 inventory of terrestrial resourcesfor half of to standard scientific nomenclature Mali,whereasthe same area wouldhaverequired5,000 aerial Plant species (wild and domestic)--according to photos on a scale of 1:50,000(excluding ground surveys). standardtscientific nomenclature 5. ESCAPplans to supplementits report on the state of the standard scientific nomenclature environment witha sectionon resourceaccounting, basedon one or two case studies. B. Nomenclature of ecosystems 1. Water ecosystems References Open sea Coastal ecosystems de Jouvenel, Bertrand. 1966."Proposition a la Commission des Inland ecosystems Comptesde la Nation."Ministeredes Finances,Paris. Pro- 2. Terrestrial ecosystems cessed. Forest Dravie,ChristopheA., GeorgesHainnaux, and Jean LouisWe- Woodland and pasture land ber. 1983. "Essaid'Etablissement d'un Comptedes Sols en Health C6te d'Ivoire." Regional African Seminar on Natural Re- Meadow and land under cultivation sourceStatistics.November. Abidjan. Processed. Turf ESCAP (Economic and SocialCommission for Asiaand the Pa- Pioneer ecosystems cific).1982. "Review and Appraisalof Environmental Situa- 3. Other ecosystems tion in the ESCAP Region."Bangkok.Processed. JARIW-ECA(International Association for Researchon Income C. Nomenclature of agents and Wealth-Economic Commission for Africa).1982. Record According to the traditional distinction of the SNA of the regionalAfricanconference, November 15-20. Vol.11. among: Douala,Cameroon. Processed. Households InstitutNationalde la Statistiqueet des Etudes lconomiques Business firms (INSEE) et Ministerede l'Environnement. 1986.LesComptes Administrations du Patrimoine Naturel-La Documentation Francaise. Paris. Other (such as foreign entities) Myrdal,Gunnar.1970. The Challenge of WorldPoverty.New Other subcategories: York:RandomHouse. Business: environmental firms or managing bodies Rapport,David, and Anthony Friend. 1979."Toward a Compre- (agricultural and nonagricultural) hensive Framework for Environmental Statistics:A Stress Administrations and environmental public bodies Response Approach." Statistics Canada,Ottawa.Processed. (associations, local administrations, and central United Nations.1982.Surveyof Environment Statistics: Frame- administrations work, Approaches,and StatisticalPublications. Statistical Papers,seriesM, no. 73. NewYork. Notes UNEP (United Nations Environmental Programme). 1981. "Earthwatch: An In-depth Review.EnvironmentalData." 1. The term "patrimony accounts"is a directtranslationfrom eport 1. Nairobi.Processed. the French language.The Frenchsystemis verybroad and Weber,J. L. 1983. "The FrenchNaturalPatrimonyAccounts." includes,in additionto naturalassets,those witha historical Statistical Journalof the United NationsEconomicCommis- or culturalvalue. sion for Europe1:419-44. 2. Economicpatrimony accounts have been prepared since World Bank. 1981. Accelerated Developmentin Sub-Saharan 1986withinthe framework of the expanded SNA. Theyassess Africa:An Agenda for Action.Washington, D.C. 8 LinkagesbetweenEnvironmental andNationalIncomeAccounts Richard B. Norgaard Almostfour decadesago K. William Kapp(1950) argued users of information from the SNA, as advisersto devel- that both our conception of the development processand opingcountries, and as coordinatorsof systematicdata our nationalincomeaccountswere inadequateior devel- collectionand exchange-have initiatedvariouseffortsto opmentplanning.Neither our theories nor our primary improve the usefulnessof environmental data. The Con- indicatorsof economicdevelopment incorporatethe serv- ferenceof EuropeanStatisticiansof the EconomicCom- ices of the environment and of resources.This conceptual missionfor Europebegan to investigate the organization problembecamea popularconcernduringthe 1.960s, as and use of environmental data in 1973. awarenessof pollutionand environmental mar,agement The U.N. StatisticalOffice(uNso) began working on problemsincreasedin the developedcountries, By this the problemsof organizingenvironmental data in 1974. time the shortcomings of the grossnationalproduct (GNP) In 1983 the first of several EnvironmentalAccounting becamemore and more apparent. GNP, as conventionally Workshopswas held. In late 1984 UNSO presented "A measured, could be increased by using up limited re- Frameworkfor the Development of EnvironmentStatis- sources faster at the expense of future generations. It tics." could also be increasedboth by degradingthe environ- The Environmental Accounting Workshopshavestrug- ment and by correctingenvironmental degradation. gledwith the complexmethodological issues of howvari- Duringthe 1970seconomists and othersbeganto make ous heterogeneous environmental data should be se- serioussuggestions for changesin the Systemof National lected, organized,aggregated,and incorporatedinto or Accounts(sNA) to correct the shortcomings.In spite of linked with the informationprovidedby the SNA. Strong the logic behind many recommendations, however,the arguments,presentedpredominantly by economists, have onlysuggestion that manycountrieshaveadoptedin their been made that the SNA is already an effective tool. Its national accounts is to keep separate track of environ- defendersbelievethat it simplyneeds to be improvedby mentalcorrectionexpenditures (nameddefensiveexpen- includingboth the valueof environmental and resource ditureselsewhere in this volume). servicesin the current account and the variationin the Since the early 1970s an increasingnumber of prob- value of resource stocks and environmentalsystemsin lems in developingcountries also have been linked to the capitalaccount Someeconomists believethat appro- inadequateconsideration of environmental and resource priate techniques exist to fullyincorporate critical re- factors.Both specificdevelopmentprojectsand general source and environmental valuesin the SNA. Others be- strategies failed to reflect environmentalopportunities lieve that environmental accounting should be and constraints.In the early 1970s the politicalleaders, independentof economicaccountingand that linkages government advisers,and academicsin developing coun- should be made betweenthe accountsas appropriatefor tries rejectedthe concept of an environmental crisis as differenttypes of questions. perceivedby their counterparts in developedcountries. Economists have developed numeroustechniquesdur- Duringthe past decade,however, someof them havebeen ing the past three decadesfor estimatingthe monetary active in reformulating development thinkingto include valuesof resourceand environmental services.The values the relationships between well-being, environment,and of the environments or environmental factors and of the resources. resourcesfrom whichthese servicesderive are the pres- The international development organizations-as major ent valueof the services.Economists havetried to ground 54 and National LinkagesbetweenEnvironmental IncomeAccounts 55 these techniquesin economictheory,have obtainedade- with economictheory.The derivationof the SNA stems quate data in some cases, and have establishedeffective from heated debate as to what should be includedand econometric procedures.' To most economists, environ- how.Thus, the SNA is based on conventionsestablished mentaland resourcevaluation is a provenarea, onewhere through a process of acquiring consensus rather than success appears consistentlypossibleafter sufficientef- basedon procedures deduced fromeconomictheory. fort. Thus most economists concernedwith environmen- tal accountingargue that the greatest problemsof the The Value Aggregation Issue SNA with resources and environmentalsystemscan be correctedby developing a good systemof accounts,with Muchof the interestin environmental accountingstems everything measuredand aggregated in monetaryterms. from a concern with the sustainability of development. Furthermore,with everythingin monetary terms, plan- Economists argue that sustainability,to the extent that it ners could readilycompareoptions. is important to people, is incorporated in individuals' The skepticsare concernedwiththe limitsof economic values and reflected in the decisions they make. For valuationor of any other single technique. They argue economists,one goal of environmental accountingis to that the environmental accountsshouldbe maintained in provideappropriateindicatorsof people's willingness to physicalunits to the extent possible and thait multiple maintain or improvethe quality of the environmentas approachesto linkingaccounts with the SNA should be development occurs.Valuation techniquesfor nonmarket developedand used as appropriate,given the question goods and services, however,rely on individualprefer- under consideration.They have been unified by their ences about the future as expressedfor goods and serv- skepticismof the economists'arguments,and they agree ices in those marketsthat are working. that questionsrelatedto appropriatedevelopment are too Environmentalists argue, however,that they are ethi- important, diverse, and complicated to be pursued cally compelledto seek sustainable development. For through a single approach. But they have so far not these people,sustainability shouldbe a constrainton, or reacheda consensuson an alternative approachor com- separatesocialobjective of, development strategies.Even binationof approaches.2 if a societydoes not select sustainability as a constraint The methodological debate has circledaround the ec- or objective,it should explicitlymonitor the extent to onomicapproach versusthe use of diverse,less formal, whichcurrent preferences jeopardizefuture generations. methods.Manyof these other methodshavebeen exper- Economictechniques, however,aggregatekey environ- imentedwith in the French systemof envirornmental ac- mentalinformationof importanceto socialdecisionmak- 3 A consensus,however,has hardly developed counting. ers and considersocialvaluesby initially weightingthem on whichmethods might be conceptually mc,resuitable with respect to individualpreferences as they are ex- or practically more effective under different circum- pressedin privatemarkets. stances. Economists maketradeoffsbetweengenerationson the assumption that interest rates reflect optimal exchanges sNA Developed by Consensus, Not Theory between present and future generations. The fact that future generationscannot possiblyparticipate in capital Most lay people and many planners assume that in- marketsprovidesa clear rationalefor social intervention creasing the GNP means that the economicwelfareof in capitalmarketsand independent socialdecisionsabout peoplehas improved. But GNP only measuresthe levelof conserving resources and environmental systems.Socie- economicactivitythat goes through the market mecha- ties could,and to someextent do, protect future genera- nism.Welfare is best thought of as the sum of producers' tions through interest rate policy.Societies frequently and consumers'surpluses-the difference between the makedecisionsto directly reserveresourcesand environ- areas under demand curves and above supply curves. mental systemsfor future generations. The information When these areas increase,other thingsheld equal,wel- for makingthese socialdecisionsshouldnot be presented fare has improved.Expendituresare an awkward combi- solely in a formreflectingthe currentgeneration'svalues, nation of the cost of supplyinggoods and servicesand as expressed individually by the rate of interest generated the producers'surplus. And other things are rarely held in capitalmarkets. equal. GNP increaseswhen subsistencefarmersjoin the Althoughthe issue of sustainabledevelopment is rela- labor force and stop producing their own food, when tivelynew,the philosophical divisionbetweenthinkingof womenjoin the labor force and hire domestichelp and socialgoalsas the sum of the goalsof a society'sindivid- childcare, when the stock of housing and factories is ualsand thinkingof societyas havingits owngoals above destroyedby war and then replaced,and when the envi- and beyond those of its individualshas deep historical ronmentdeterioratesand the government initiatescorrec- roots. Economic theory is based on the formerpremise, tive actions. but all societiesoperate on the second premiseto some The SNA has these internal inconsistencies becauseof extent, mostto a considerable extent. In the publicpolicy the difficultiesof buildingaccounts that are consistent arena, economistsare repeatedlyconfrontedby the con- 56 RichardB. Norgaard tradictions betweenthe premiseupon whichtheir indica- Economic techniquesfor valuingnonmarketgoods and tors are basedand the premiseuponwhichthey are used. servicesare alsobased on the assumption that nonmarket The ethicaldebate has theoreticalanalogs.The contra- goods are a marginalproblem. If nonmarketgoods and dictionsbetweeneconomic indicatorsbasedon one prem- servicescomprisea smallportion of the total economy, ise about societythat are used in publicdecisionsinvolv- then the inclusion of these goods and services in the ing anotherpremiseunderlie,for example,the theoretical market wouldnot significantly change the relativeprices controversy over the use of benefit-costanalysisto effi- of goods and servicesor individual behavior. In this case, cientlydesignpublic projects. If one of the objectives of existingmarket prices and behaviorcan be used to esti- a project is to redistribute income, what is the signifi- mate the valueof nonmarketgoods and services.If non- cance of an efficiency analysisderived from valuations market goods and servicescomprise a large portion of basedon prices generatedby the existingincomedistri- the total economy,however, their inclusion would signifi- bution?The weighting of benefitsand costsdependingon cantlychangerelativepricesand the valuationof nonmar- their incidenceby incomegroups is currentlypracticed, ket goods and services. Again we are faced with the but it is quite controversial amongeconomists becauseof dilemma that economictechniquesare more appropriate the valuejudgmentsit involves. the less significantthe problem. And again, advocates Withrespect to sustainability, the parallelsare clear.If and opponentsof the economicapproachare dividedas one of the objectives of public decisionmaking is to en- to whetherour problemsare smallor large. hance the likelihoodof sustainabledevelopment, what is The economicapproachsuffersfromseveraltheoretical the significance of environmental valuations derivedfrom shortcomings. One mightconcludethereforethat another information generatedby an economy that is less sustain- approach is needed. But all approaches contain similar able than desired?Withinenvironmental economics simi- methodological drawbacks.Any method of aggregating lar questionsare now being theoreticallyconsideredby environmental and resource data, for example, implies comparing total systems withand withouta policychange. valueweightings which"should"be made by society.Yet Usingthis approach,the valuesof environmental services societyas a wholecannot be involved in everydecision. are derivedfromthe differences in utilitygainedwith and Some methodof weightingis necessaryso that those to without the policy change. This theoretical "solution" whomsocial decisionmaking has been delegatedcan as- reversesthe processadvocated by economists forenviron- sess current conditions,foreseethe consequences of al- mentalaccounting: environmental valueschange as a re- ternativecoursesof actions,and make decisions.Indeed, sult of the policyinput rather than environmental values evenif all decisions were madecollectively, aggregation- providing input to the policychange. with implicitvaluations-wouldbe necessaryto convey The determination and use of interestrates reflectsthis informationin a usableform to the public. This issue is theoreticalquandary.Economists argue that the valueof beingreferredto as the valueaggregation problem. resources savedfor the next generation,say twentyyears The valueaggregation issue can be used to reduce the hence, is equal to their valueat that time discountedby methodological debate to an ethical debate, with each dividing the valueby one plus the rate of interest to the side leaving the proponents of the other methodology twentieth power. Giventhe economist'stheory of how with little more than their valuessupportingtheir argu- interest rates are determinedin intergenerational capital ment.But one can look at the issuealso in the following markets,however, it would be just as appropriateto ask constructive way. Each methodology gives different how future generationswould interact differently in the weights to the valuesaround whichinterestgroupsorgan- capitalmarket and affectthe rate of interest if they were ize. With multiple methodologies giving alternative wealthierbecause this generation had redistributed re- weights to differentinterests,the interests of all could be sourcesin their favor. protectedand a Pareto optimal solutionmightbe possi- The conventional economicanswer to this issue has 4 The valueaggregation ble. problemin this light becomes been to argue that market values with and without a an argumentfor methodological pluralism-for the use of policychangewillbe veryclose for small changes.This, multiplemethodologies to help insure that all valuesare however, wouldbe incorrectif the ultimateobjective were respectedto the extentpossible. to significantly change the direction of development. In short, if the currenteconomicdevelopment path wassuf- The Bounded-KnowledgeSynthesis Issue ficientlyinappropriatethat significantcorrectionswould be calledfor, current market signals would not provide All modelsof social and environmental systemssuffer appropriate indicators of how the path could best be from another problem. Scientificknowledge stems from corrected.Signalsgenerated by economicmethodology specificmodelsthat simplifyreality,in part, by artificially are best for fine-tuning on the margin.Quiteconsistently, boundingthe field of study.Sciencehas not provideda supporters of, and detractors from, the economicap- wayto synthesizeboundedknowledge into knowledge of proachtend to hold differentopinionsas to whetherfine- the whole.Yet such a synthesisis exactlywhat environ- tuningsor significant changesare needed. mental accountingneeds in order to derive better indi- LinkagesbetweenEnvironmental andNationalIncomeAccounts 57 cators for planners.This problem willbe referredto as the complexinteractions betweeneconomicdevelopment the bounded-knowledge synthesis issue. and the environment. 5 The value aggregation and Eachmethodology for aggregating boundedknowledge bounded-knowledge synthesisproblemsindicatethat this worksbetter for some types of knowledge,less wellfor beliefis naive.A consensus for one methodologycan only others. Preferencefor one methodology over anotherfre- be reached by "nonlogical" means.Logic,however, indi- quentlystems from an individual's special understanding cates that multiple methodologies-conceptual plural- of a particularaspectof a problemand relativenaiveteof ism-providethe keyto a safer and more pragmaticstrat- other aspects. Dependingon the question being asked, egyfor linkingenvironmental and economicaccounting. somelinkingmethodologies willbe ableto addressknowl- Sustainabilityis too important,too multidimensional,and edge more closelyrelated to the question than others. too poorlyunderstoodfor societiesto rely on one meth- One procedure,for example,might effectively aggregate odology. soil fertility with economicproductivity, while another might aggregatethe abilityof the soil to hold moisture Conclusions duringdroughtsto the variationsin the need lbr foreign exchange.Each methodology for aggregatinghas advan- The approachto combining environmental information tages dependingon the questionbeing asked. with the SNAfacescertain difficulties becauseof the deri- The bounded-knowledge synthesisissue also supports vationof the SNA(by consensusrather than a deductive a pluralisticapproach to aggregating environmental and methodology) and its attendant shortcomings; the value- economicinformation.The rule of "safetyfirst" would aggregationissue;and the boundedknowledge-synthesis indicatethe use of multiplemethodologies to insurethat issue. decisionmakers haveinformation alertingthemto as many The existenceof these problems means that broad, aspects of environmental and resource phenomena as aggregateindicatorsfor planners willhaveto be derived possible.Decisionmakers shouldnot be limitedl to knowl- by consensusrather than by a deductivemethodology. edgeboundedby the particularmodelsbest addressedby Each specificapproach advocatedby one group can be one linkingmethodology. Plannersand policymakers do shownto containshortcomings or inconsistencies.There not alwaysknow whichquestions should be asked and is thereforea need to pragmatically work toward a con- whichmethodologies are most appropriate. sensus. Althoughno one methodology can be logically The valuationof environmental servicesand resources correct,the use of multiplemethodologies willreducethe and of their respective systemsand stocks is a methodol- likelihood of makinga significant error. ogy that facilitatesnothing more sophisticated than addi- In conclusion,less effort shouldbe spent on debating tion. Marketgoods and servicescan be combinedwith and more on experimenting, learningthrough doing,and nonmarketenvironmental factorsafter valuation to obtain sharingexperiences. It seemsappropriateat this stage to better measuresof the level of economicactivity.Simi- try two or three differentapproachesto environmental larly,the valueof natural resourcestocks and of environ- accounting in each of four or fivecountrieswith different mentalsystemscan be added to that of man-made capital. types of environmental problems. Future workshops If better measuresof the levelsof economicactivityand shouldbe directed towarddiscussingthe practicalissues the valueof assets are needed,valuationis an appropriate encounteredand sharingthe results. approach. Policymakers and plannerswantto knownot only how Notes wellthe economy is doingbut howit mightbe improved. For this they need to be able to predict the cutcomesof 1. For a generalreviewof and guideto the use of these alternativedecisions.And predictionsrequire modelsof techniques,see Hufschmidtand others (1983). Much of the cause and effect-of how differentmixes of economic theoretical developmentofthesetechniqueshas beenpublished activity affect, and are affected by, resources and the in the Journalof EnvironmentalEconomicsand Management. environment over time. GNP is like a speedometer, and Peskin (1981) providesthe clearest description of the use of improvements in a speedometer's accuracy could prove these techniquesto modifythe SNA. quite important. But a speedometer does riot indicate 2. This is welldocumentedin the rapporteurs' summaryof whether the wheels are spinning on ice or even on the the meetingin Washington, D.C.,November 1984. road. To address the questions of long-term economic 3. The Frenchsystemof environmental linking,for example, and environmenta a mapise planning,. V n has manyattractivefeatures,but those opposedto the econo- candenvironmentl planninga m is neededt . Valuation mists' view cannot agree on its strengths and weaknesses. See can still be helpful when combinea with explanatory mod- Chapter7. els, but for most questions valuation itself is inadequate. 4. A Pareto optimalsolutionis one in whichsome or many In summary, the theoretical component of the debate individuals wouldbe better off and, at the same time, nobody over the appropriate methodologyfor combining environ- wouldbe worseoff. mental and economic infornation has been sustained by 5. "Criticalrationality"-the beliefthat rational methodsex- the belief that there is a correct method for understanding ist for applyingscientific knowledge to socialquestions-is the 58 RichardB. Norgaard dominantbeliefamong scientists,economists,and policymak- M.,D.E. James,A. D. Meister, Hufschmidt, B. T. Bower, and J. ers. The belief is supported, althoughnot "logically," by the A. Dixon. 1983. Environment, Natural Systems, and- mainstreamepistemology of Popper (1979). During the past Development: An EconomicValuation Guide.Baltimore,Md.: decadethe dominantbeliefsystemhas been attackedbyphilos- Johns HopkinsUniversity Press. ophers (Feyerabend 1974 and 1978), by systems theorists Knapp, K. William.1950. The Social Costs of PrivateEnter- (Churchman 1979),and by planners(Ulrich1983). prise. Cambridge, Mass.:HarvardUniversity Press. Peskin, Henry M. 1981. "NationalIncomeAccountsand the Environment."NaturalResources Journal21(uly):511-37. References Popper,Karl. 1979.ObjectiveKnowledge: An Evolutionary Ap- proach. Revisededition. Oxford, U. K.: OxfordUniversity Churchman,C. West. 1979. The Systems Approach and Its Press. Enemies.NewYork:BasicBooks. Ulrich,Werner.1983.CriticalHeuristics of SocialPlanning: A Feyerabend,Paul. 1974. Against Method. London:NewLeft NewApproach.Bern: Paul Haupt. Books. UnitedNations. 1984. A Frameworkfor the Development of . 1978. Science in a Free Society. London:New Left EnvironmentStatistics.StatisticalPapers, series M, no. 78. Books. NewYork. __ _ _ _ _ _ 9 andNonmarket Environmental Accounting Countries in Developing Uenry M. Peskin National accountingsystems, in one form cr another, nomicactivity. The OECD surveydid not ask the respon- exist in nearly every nation, regardless of the nation's dents whythey engaged in nonmarketaccounting.How- stage of development.The United Nations encourages ever,since only a dozen of the 150 nations classifiedas standardization both in accounting proceduresand in the developing displaythe nonmarketinformation separately, layoutof final tables-presumably to make it easier to it can be inferredthat more importanceis being placed compare economic performance across nations. One on providingbetter measuresof economicperformance could argue, however,that there is a special need to than on buildingbetter data systems(Blades 1975, p. depart fromthe standardin developing nations. In partic- 406).The concernthat neglectingsubsistenceeconomic ular,they maybenefitmore than developed nations from activitycauses total economicactivityto be underesti- modifications that better accountfor the coniributionof mated seems well justified.Of the forty-eightsurveyed environmental and other nonmarketassets. countriesthat were able to determinethe share of gross An importantcharacteristic of these nations,and a key domesticproduct (GDP)accountedfor by subsistenceac- indicator of their stage of development, is the large tivities,nineteenestimatedthat these activitiesaccounted amount of economicactivitythat occurs outside organ- for more than 20 percent of total GDP. Moreover,this ized markets. This activityhas not been ignored by na- percentage must surely be an underestimatesince, as tional accountantsin these countries. Acccrdingto a Bladespoints out, many nonmarketproductionactivities surveyconducted by the OECDDevelopment Centre,most are not accountedfor at all. For example,most countries respondingnations accountl:o some de- of the sixty-five surveyeddid not make an estimate for food processing, gree for nonmarket,subsistenceactivities(Blades1975). handicraft,construction,water portage, and transporta- There is no evidence,however, that any of these nations tion activitiesin the household sector. accountfor the servicesof the environment, the principal The OECDsurveydoes not indicatewhetherany of the nonmarketasset that is the concern of ministriesof the respondents attempted to account for any nonsubsist- environment. ence, nonmarket activities-in particular,the consump- This chapter points out howa system of national ac- tion ofthe servicesof the environment. To myknowledge, counts, possiblydeveloped along the lines of the frame- no nation, developed or developing,has adoptedformal work described in the next chapter, could better serve accountingfor the servicesof the environment, although the needs of developing nations. Certainimplementation in recent yearsthe U.N.Environment Programme (UNEP) problemsspecificto these nations are discussedand a has beenattemptingto determinewhatrecommendations courseof actionsuggested. should be made to member nations along these lines. UNEP and the World Bank are concerned, with some Uses of Expanded Accounts justification,that neglectof environmental deterioration, in Developing Countries and especiallydeterioration of the stock of natural re- sources,willgive a false picture of economicgrowthas In developingas wellas developed countries,there are measuredconventionally by national account aggregates two principaluses of the accounts:to generate measures such as the net national product (NNP).' Thus, although of economicperformanceand to organizedata on eco- the neglect of many subsistence nonmarket activities 59 60 Henry M Peskin causes conventionalnational accountingprocedures to will not measure true opportunitycosts, and observed generatedeficientindicatorsof economicperformance in output prices willnot measure true socialbenefits.Given developing nations, perhaps a more importantreason is thiswell-known resultfromeconomic theory,development their neglectof the deteriorationof the stock of natural economistshaveattempted to construct shadow cost or resources and environmentalcapital. This neglect has price measures,whicheither supplementor replace the received much recent attention becauseof the failureof conventional monetary measures.3 It seems, however, that development policiesto generatesustainedgrowth. much more attention has been directed towardthe bene- Historically, overlooking declinesin the stock of natural fit side than the cost side, even though theory suggests resourcesin the conventional accountswasthoughtto be that observedcosts and pricesfail to adequately measure of littlesignificance. This viewwas basedon the fact that valuesfor reasonsthat are just as applicable to costs as discoveries of new natural resourceswere also neglected, they are to benefits. Based on the relative number of as were other resource-increasingfactors such as re- books and articles devotedto each subject, one would charge and the natural growth of renewableresources. haveto concludethat plannersare far more satisftedwith Therefore,as long as discoveries, recharge, and growth their measuresof cost than with their measuresof bene- equaledor exceededdepletions,this mutual neglectwas fits. thought not to have any adverse social consequences Clearly, however, whenthere is a large degree of non- (Landefeldand Hines 1982).2The current perception, market activityin an economy,monetarymeasures can however, is that discoveries,recharge,and naturalgrowth be just as deceiving for estimatesof true opportunity costs are not keepingup with depletion.Moreover, for stocks as they are for estimates of social values or benefits. of such environmental capital as clean water, clear air, Moreover, rectifyingthe problem can be just as difficult. and natural forests,the potentialfor new discoveries and There is, in fact, no easy quickfix.Although the literature rapid increasesin growthappear slimindeed. Therefore, implies that correct cost estimatescan be madeby adjust- as long as maintainingthe stock of these resources is ing the observedvalues,determiningthe appropriatead- consideredessential to sustainedgrowth in developing justment factors is no easy matter (Little and Mirrlees nations(an assumption examinedin the next section), the 1969). For many years,the planning professionhas rec- neglectof their deteriorationin the accountsis especially ognizedthat the analysisof complexeconomicinterde- serious. pendencies requiressome typeof interindustry or activity With respect to the second traditionaluse of national analysis. One of the most importantcontributionsof con- accounts-a frameworkfor the consistent assemblysf ventionalnationaleconomicaccounting has been its abil- economicdata-conventional accounting practice that ity to generate the data sets necessaryto support such neglectsnonmarketactivityis alsodeficientfor the needs analyses.An expandedaccountingsystem that includes of developing nations. Althoughthis deficiencyhas not nonmarket,environmental activitiescan serve this tradi- receivedmuch attention in the literature, it should be tional role for those developing economiesfor whichthe clear that if nonmarketactivityis widespread in an econ- nonmarketedeconomicactivities are as importantas the omy and if such activityis ignored in national data sys- marketedones. tems, then these systemswill not be able to support accurateanalyses of economicbehavior. Implementation Problems Althoughcynicsmayfeel that such analyticaldeficieri- cies affectthe communityof analystsfar more than the Several problems,uniquein the developing nations,can community of developing nations,the lackof a framework arise if the attempt is made to implementan expanded, for assembling nonmarketdata can havemore than mere nonmarketaccountingframework. Two of these are dis- academicconsequences. Development plannershave be- cussedin this section.These problemsare not critical in comeincreasingly awarethat a lack of data on nonmarket the sense that their solution is a necessaryprecondition activities, especially those that lead to negativeexternali- for implementation. In particular,the valuation difficulties ties such as pollution, mayproduce a distorted viewof discussedbelowmaynot be fullysolvable.However, the the likelybenefits of actual and proposed development failureto find acceptablevaluations for nonmarketgoods projects.I do not believethat they are as equallyaware and serviceswill not diminishthe usefulnessof the ac- of the contributionthat a completeaccounting of market countingstructure as a data systemto support economic and nonmarketactivitiescan maketo the analysis of the planning,particularlyin its abilityto shed light on the opportunitycosts of actual and proposed development true opportunitycosts of alternativedevelopment strate- projects.Indeed,for estimatingtrue opportunitycostsas gies. wellas benefits,it is the accounting framework, and noi: merelythe assembly of nonmarketdata, that can make a Accounting for EnvironmentalAsset Depreciation significant analytical contribution. This assertionderivesfromthe fact that, in the absence The following chapter emphasizesthe important dis- of perfectly competitive markets,observed monetarycosts tinctionbetweenphysicaldeteriorationand economicde- andNonmarket Environmental Countries 61 Accountingin Developing preciation.Onlythe latter is properlyaccountecl for in an the demiseof an economy,there does not appear to be economicaccounting framework. 4 As noted in that chap- any convenient-way to reflect this fact in a single set of ter, it is quite possible for a nonmarket (or a market) economicaccounts. One year's income accounts could asset to remain physically intact but to depreciate eco- reflect the shrinking of the asset with a depreciation nomically in the sense that the present valueof the ser- entry,and a singleset of wealthor asset accounts could vicesgeneratedby the asset declinesover time. The op- displaythe remainingstock. Only by analyzingsuch ac- posite is also possible.An asset, such as the stock of counts overseveralyears could inferencesbe drawncon- standingIndonesianhardwoods,can suffer sorne degree cerning whenthe stock willbe exhausted.Whetherthe of physicaldeteriorationand still haveits present value exhaustionof the stock willmeanthe demiseof economic increaseover time, whichimpliesnegativedepreciation, activitycannot be revealedby the accounts, except, of or capitalgain. course, in the year when the demise occurs. Thus, ac- The effort to introducethe concept of true economic countingfor the depreciationof natural resourcesmight depreciationinto nonmarket accounting in developing make only a minor contributionto preventingthe even- nations raises a number of issues, some of whichare tual collapseof the economybecauseof the exhaustion amenableto technicalsolutions.Other issues are funda- of a natural resource. mentallymore serious,however, in that they addressthe To speak of eventualeconomiccollapseis certainlya wholepurposeof the accounting exerciseand 'the poten- dramatic characterization of the sustainability problem. tial conflictsbetweeneconomicand conservation objec- The dismalresult relieson one or more of the following tives.Thus, these latter issuesare addressedfirst. assumptions: that there is no technicalprogress,that the Environmentalists and, increasingly,economicplanners exhaustible resourcehas no effective substitutes,and that are concerned that development programs may deplete there are, indeed, identifiableassets whose contribution certain vital natural resources. As a result, short-term to the economy is so crucialthat theirphysicalexhaustion economicprogress could be followedby long-termeco- indeedwouldmean economiccollapse. 5 Page apparently nomicdecline-that is, the growthmaynot be sustaina- feelsthat it is fairlysimpleto identifynatural resources ble. A related concernis that evenif growthmaybe able that meet these characteristics; he cites, for example,the to continueunabated,its composition maynot,be suited establishment of a strategicstockpileof critical materials to the tastes of future generations.Unlessthe full menu for national defense (Page 1977, p. 184). However,a of assets now availableis conserved,future generations strategicstockpileis intendedonly to fulfilldemandsdur- will be deprivedof the options availableto the present ingfairlyshort-termeventssuch as droughtor war.Decid- generation.Can and should the economicaccounts,ex- ing what assets are critical to the sustainability of eco- pandedto includethe servicesof the environment, reflect nomicgrowthcertainlyrequiresa longertime frame. these concerns? In the context of developingnations, one naturally The resources in question need not be confined to thinksof such resourcesas agricultural land, forests,and nonmarket,environmentalassets. In fact, often the ex- watersupplyas potential candidatesfor long-runconser- amplescited as such are marketedassets,such as miner- vation regardless of any calculation of present value. als and farmland. The argumentis that the privatemarket Those countrieshighlydependenton the export of min- mechanismis not sufficient to ensure that the stock of erals would certainlyadd such mineralsto the list. Yet, these assets willbe adequately preservedfor future gen- upon closer examination,it is not so clear which,if any, erations.(Presumably the problemis just as severe,if not of these assets are crucial to long-runsustainability (in worse,for assets that do not trade in the marketplace.) It Page's sense),and, more important,it is not clear to what is quite possiblethat a private economyactingoptimally extent their calculatedpresent valuesdistort their true (to maximize the presentsocial valueof its assets)could socialvalues. bring itself to a point of extinctionby exhaustingeven Of the assets mentioned above,water, and especially one of its vital natural resources(Page 1977; Lind and the supplyof potable water,appears to be the most cru- others 1982).There is no inherent mechanismin a free cial. Because of the lack of substitutes, its demand is market economy to prevent possible self-destruction. inelastic(assuming that desalinized salt wateror imported Therefore,the value of vital assets as revealedby the freshwater are not practicalalternatives). Therefore,it is market underestimatestheir true valueto the very exis- quite possiblethat as a nation's supply of fresh water tence of the society.According to this line of thinking, diminishes, its unit valueincreasesat a greater rate, lead- the socialvalueof such assets should not be determined ing to an ever-increasing imputed or measuredvalue of by the present value of income generatedin the future, fresh water wealth. Clearly,in this case, the apparent but rather by an appealto a conservation ethic, an ethic increase in the nation's water wealth would give a dis- that rejects economicvaluationas inadequateto reflect torted picture of social well-being. Can the same case be the needs of future generations. made forthe criticalityof other, so-called vital assets?To Before examiningthis argument, it should be noted answerthis question,it is usefulto considerone poten- that ifthe depletionof someasset doeseventually lead to tiallycriticalasset, agricultural land. 62 Henry M. Peskin Whetheragricultural land is as criticalas potablewater ValuationCriteriaand Social Organization depends on what one means by "agricultural land." Clearly,the elasticityof demand for the aggregateof all If an attempt is made to implementthe expanded ac- agriculturalland is quite differentfrom the elasticityof counting structure described in the followingchapter, demandforthe individual parcelsthat makeup the aggre- severaldifficulties must be overcome.Clearly, the lack of gate. If these componentsare highly substitutablefor data is one of the more serious problems.There are, each other, taken individually none could be considered however, evenmore seriousimpediments. Theseare more vital.Moreover, becausethe substitutability implieshigh serious in the sense that they involveconceptual issues elasticitiesof demand, physicalreductionsin individual that, unlike the paucityof data, are not easilycorrected parcelswillimplyreductionsin their values.That is, the evenif a developing nation had more resourcesto work reductions in quantitiesare less likelyto be offsetby high with. increasesin prices. Therefore,a present-value wealthac- One issue concerns the possibility of determiningim- countingwould not falselyindicate an increasein land puted nonmarketvaluesthat are independentof a coun- wealth. try's economicand social structure. If, for example,the Whatif someof the parcelswerehighlyspecialized and valuation procedurerelies on society'swillingness to pay the elasticityof demandwerehighlyinelasticfor the prod- for the nonmarketedservices of a natural resource or ucts producedon these parcels?In this case,it is possible some other environmental asset, then clearlyit wouldbe (but by no means assured) that a present-value wealth impossible to devisean economicvaluation withoutknow- accounting could indicatean increase in wealtheven as ing the society'spreferences. the physicalstock of such land declined.Althoughthis If one acceptsthe principlethat a societyshouldevalu- could possiblybe misleading,there would not be any ate its ownassets,then the lack of a socially independent serious social consequencesunless the products gener- valuationmaynot provetoo troubling.It does create two ated by this land were so crucialthat the entire economy problems,however. First,it becomesdifficult to makeany dependedon them. comparisonsof expanded national income and product Certainlyit wouldbe disastrousin a developing country amongcountriesif the countries haveverydifferenteco- if the wealthaccountsindicatedthat the amountof land nomic and social structures. Second, tracking economic (in valueterms)devotedto, say,a crucialexport crop was performanceover time can also be difficultif there have increasing when,in fact, it was decreasing.However, the been substantialsocial and economicchanges.This sec- existenceof such a possibility does not justifydeclaring ond problempresents a special conundrumif one of the all agriculturalland as crucialand, therefore,not subject purposes of economicaccounting is to determine the to present-value valuation.Moreover, whatmayappear to extentof economicchanges. be crucialin the short run may be quite expandablein Thesepoints couldbe used to argue againstnonmarket the longrun. The stock of silk wormsis hardlycrucialto accountingin general. However,market prices also de- the present-day Japanese economy, but it may have pend on a country'seconomic and socialstructure. Thus, seemedso in the sixteenthcentury.Indeed,it could be as is wellknownby nationalaccountants,comparisons of arguedthat, givenhumaningenuity, all assetsare virtually nationalincomeaggregatescan alsocontainlimitationsif substitutable in the long run. If so, rather than searching the countriesbeing comparedare very different.Country for sustainablelevelsof particularvital assets,the appro- A could have the higher GNP if its relativeprices were priate conservation principle mightbe to maximizethe used for the comparison, whileCountryB could havethe levelof all assets in the aggregate.A natural measure of higherGNP if its relativepriceswere used. Although there this aggregatelevel is its monetary value, that is, the is no solutionto this problem,the responsiblecourse of present value of gross national product (GNP). In other action would be to use both sets of prices for making words, accordingto this argument,the best legacyfor two-country comparisonsif the differentprice relatives future generationsis a high levelof (properlymeasured) wouldmaterially affectthe results. Alongthe same lines, incomeand capital formationin the present generation for makingcomparisons of nonmarketGNP betweencoun- (Baumol 1969). tries, the prudent course of actionwould be to use valu- The accountingstructure put forth in the following ations that would reflect differenteconomicand social chapterimplicitly adoptsthis viewwithtwo crucialprovi- structures. Of course, in viewof the difficultyof produc- sos (alsoendorsedby Baumol): that GNP (and the under- ing evenone set of nonmarketvaluations, this procedure lying asset base) be defined to include nonmarket ser- is unlikely to be followed. vices, particularlythe services of the environment, and Valuationmethods used to implementthe expanded that certainassets, such as air, potable water,plant and accounting structure can be based on methodscommonly animalspecies,beautifulvistas,and the cultural heritage used for benefit-costanalyses.These methodsfrequently be recognizedas vital and irreplaceableand therefore use the conceptof willingness to pay-the ideabeing that beyondeconomic evaluationand beyondthe scope of the the valueof a nonmarketedgood or service should be expandedaccounts. measuredby what societywouldbe willingto pay for the Environmental and Nonmarket Accounting in Developing Countries 63 good or servicewere it marketed.In practicethis usually lected,effortsshould be made at monetaryvaluation.In meanswhat individuals in societywouldbe willing to pay. the U.S. contextbenefit-cost techniqueswere used.Thus, This focuson the individual is consistentwith the central for example,the valueto firmsof wastedisposalservices propositionof capitalistic,free market economies:that providedby receiving waterswas estimatedby the oppor- the consumeris sovereign. tunity costs to the firms if they were deprived of these Relatedto the problem of makingcomparisons among services.These costs,in turn, were estimatedby various countrieswhen economicand social struzturesdiffer is techniquesthat attempt to measuresocial willingness to the problem of whetherthe willingness-to-pay conceptis pay to avoid pollution (for example, the travel cost appropriatefor economicsystemsthat have aimore lim- method, the property valuation method, and the dis- ited role for consumersovereignty. 6 And if it is deemed countedproductivity method). inappropriate, what principlesshould take its place, and As noted above,it cannot be assumedthat any of these what valuationmethodsare consistentwith thleseprinci- methodswillwork in a developing country.Thus, a dy- ples? Answersto these questionsare importantcompo- namicresearch effortis calledfor-dynamic in that it will nents of the task of finding nonmarket valuationsfor have more of the characteristics of developmentalre- expandednational accountingframeworks in developing search than of appliedresearch, althoughthe vastlitera- countries. ture on benefit-cost techniquesmayprovidea usefulpoint In a developingcountry, it is important to develop of departure. Becausethis initial effort willbe explora- valuationsand valuationmethods that reflect both the tory, the qualityof much of the assembledinformation principles of the country'ssocialphilosophy and its social and its valuationwill not be very good. This does not objectives.Sustainable economic growth-one of the more mean that the informationwill not be useful, however. importantsocialobjectives-must be translatedinto con- Indeed,the U.S. experiencehas indicatedthat much of cepts that lendthemselves to measurement and valuation the preliminary information, especially on the physicaluse if this objectiveis to be reflected in the expanded ac- of the environment for wastedisposal,is of great use to counting system.Indeed, it may not be possibleto de- policymakers. Nevertheless, becauseso much of the infor- velopvaluationschemesthat fullymeasurethiedegree of mation necessarily has to rely on estimationrather than sustainability. Yet, it is importantto poinitout that the on direct observation,the pilot project is probablybest accountingframework, evenwithoutcompleteor perfect done by a nongovernmental agency,such as a university, monetaryvaluations,can providea data systemthat can in cooperationwith variousministriesthat could provide be of tremendoususe to those responsiblefor making some of the supportingdata. sustainable development policy. It is difficult at this time to be too precise about the appropriatestaffingof such a pilot effort in a developing Suggested Course of Action country.Regardlessof the level of effort, however,it is important,for two reasons,that the bulk of the work be Although there is some experiencein implementing the done by nationalsand not by foreignconsultants.First, expandednational accountingstructure describedin the becausea long-term,multiyeareffort is necessary, heavy following chapter, the effort to developthis framework staffingby consultants is likelyto makethe costs prohib- reliedtotallyon data from,and condition;in, the United itivelyhigh. Second, unless the bulk of the work is done States (Peskin1987).No case is knownwherethissystem by nationals,there is a good chance that the accounting or some other nonmarketaccountinghas been fullyim- effort will die when the consultants depart. Thus, an plementedin a developing country,althoughthere have importantgoal is not simplyto constructa resource ac- been some partial efforts (Repetto and others 1987). counting system, but also-and perhaps more impor- Thus, implementation or, more precisely, initialsteps at tant-to developresource accountingskills in the coun- implementation should be viewed as a pilot project. try.At a minimum, a viableprogram,whichwouldachieve Basedon the experiencein the UnitedStates,the start- these goals, would require two full-time nationalsand ing point is to assemblea completebodyof physicaldata about three to six staff-months of outside consultantsa coveringthe stock of environmental assels, the demands year. for the servicesof these assets (forexample,the demands One other considerationin determiningthe level of for waste disposalservices by industry,the demand for effort concerns the scope of the accounting function. recreationservicesby householdsand tourists, and the Should the expanded accounts be confined to environ- demandfor potablewater),and the negative physical con- mentalassets or shouldthe effort attempt to cover a full sequenceson final and intermediatedernandfrom con- spectrum of nonmarket assets? In principle, the latter sumptionof these services (for example,adversehealth approachis preferable,basically becausea fullyexpanded effectsfrom water pollution,damageto crop production accountingsystemwillbe able to show important rela- from soil loss,and damageto electricityproductionfrom tions betweenenvironmental asset use and other nonmar- sedimentation). ket activity.For example,the amountof labor devotedto After or, better yet, while the physical data are col- household fuelwoodproduction,a significant nonmarket 64 HenryM. Peskin activity in many rural societies, crucially depends on the havethe desiredcharacteristics, even though all the inputs in location and availabilityof natural forests and, of course, such a functionare, by definition,substitutes. on competing market and nonmarket sources of energy. 6. Following the analysisof Marglin(1984),if an economic Analysisof such projects as the development of plantation systemwere based on neo-Marxist principles,consumersover- forests would be greaty facilitated if the accounting sys- eigntywouldbe limited,in theory,to the short-rundetermina- tion of output mix. In contrast,if an economywere structured tern reflected these interdependencies. according to neoclassicalprinciples,consumersovereignty would Realistically, limitations of available staff and money have a much larger role to play.Of particularimportancefor may preclude development of an accounting system that the justificationof cost- benefit techniquesis the role of con- fully covers all nonmarket assets. It may be necessary to sumersovereignty in determining relativeprices. confine the effort to environmental assets. Indeed, it may be necessary at first to confine the effort to one or two References particular assets, such as water and natural forests. Such initial, modest steps should be encouraged. Baumol,WilliamJ. 1969. "On the DiscountRate for Public Projects."In U.S.Congress,TheAnalysis and Evaluationof PublicExpenditures. The PPB System. Papers submittedto Notes the Subcommittee on Economy in Government of Joint Eco- nomicCommittee, vol. 1. 91st Congress,1st session. 1. In the accountingschemeoutlinedin the following chap- Blades,DerekW. 1975. "Subsistence Activitiesin the National ter, depreciationof natural resourceswill not affectthe gross Accounts of Developing CountrieswithSpecialReferenceto productaggregates, such as GNP. LatinAmerica." Reviewof Incomeand Wealth21(4,Decem- 2. Of course, such a viewneglectsthe importantdistinction ber):391-410. made in the followingchapter between changes in physical Landefeld, J. S., and J. M. Hines.1982. "Valuing Nonrenewable stocks and changes in the value of those stocks. A country NaturalResources:The MiningIndustries,"In U.S. Depart- could be suffering a real loss in wealtheven if physicalstocks ment of Commerce, Measuring NonmarketEconomicActiv- of certainnaturalresourcesincreased,if the resources:n ques- ity. Bureauof Economic AnalysisWorkingPaper. Washing- tion provedto have decliningvalue. The shift from tropical ton, D.C. hardwoodforests to softwood plantationsin Indonesiamay Lind, Robert C., KennethJ. Arrow,Gordon R. Corey,Partha providean example. Dasgupta, AmartyaK. Sen, ThomasStauffer, Joseph E. Stig- 3. Although the terms "shadow cost" and "shadow price" are litz, 3. A. Stockfish,and Robert Wilson. 1982. Discounting widely used, they are often defineddifferently by differentau- for Timeand Risk in EnergyPolicy. Washington,D.C.:Re- thors. Here the terms are used rather looselyto refer to the sourcesfor the Future. unit values, necessarily imputed, of nonmarketedgoods and Little,1.M. D., and James A. Mirrlees.1969.Manualof Indus- services.Dependingon the imputationprocedures,the term trialProject Analysisin Developing Countries.Vol.11,Social could be equivalent to severalshadowconcepts.Examplesare Cost-Benefit Analysis.Paris: OECD Development Centre. the shadowpricesgeneratedby a linearprogramming problem Marglin,Stephen A. 1984. Growth,Distribution,and Prices. or the shadowwages,as definedby Little and Mirrlees(1969), Cambridge, Mass.:HarvardUniversity Press. used to measurenet consumption changesassociated withthe movement of labor from agricultureto industryas a result of Page, Talbot. 1977. Conservationand EconomicEfficiency. development projects. Baltimore, Md.: Johns Hopkins UniversityPress for Re- 4. The following chapter shows,however, that the two con- sourcesfor the Future. cepts can be related.Value depreciation can be definedto equal Peskin,HenryM. 1987. "National Accounting and the Environ- physicaldeteriorationminus capital gain or plus capital loss. ment." Resources for the Future, Washington,D.C. Proc- Nevertheless, the two conceptsare quitedistinct. essed. 5. In effect,the resultpostulatesa verysimpleeconornywide Repetto, Robert, MichaelWells,Christine Beer, and Fabrizio production function,whichis not separablewithrespectto any Rossini.1987. "Natural ResourceAccounting for Indonesia." of its inputs.A simpleCobb-Douglas productionfunction would WorldResources Institute,Washington, D.C.Processed. 10 A Proposed Framework Accounts Entronmental Henry M. Peskin The objective of expanding the nationalincomeand prod- the economy, whether or not these materialsare valued uct accountsto encompass the environment requiresthe with a positivemarketprice. Usingtechniquesof interin- development of a theory linkingenvironmental data with dustry or input-outputanalysis,these material balance the economicinformationalready covered by conven- approaches are easilylinked to the economicdata drawn tional national accounts. Such a theory is presented in fromnationalaccounting systems. this chapter. Both an advantageand disadvantage of this approach The cost of the proposed expansionis minimizedby is its apparent neutrality: only materials are being ac- adheringas much as possibleto the accounting structure countedfor;there is no indicationwhetherthese materi- of existingnational income and product accounts,such als are good or bad. This is in contrastto other environ- as the U.N. Systemof NationalAccounts(SNA). Indeed, mentalaccountingschemesthat attempt to measure or the suggestedchanges are introducedas separableaddi- otherwiseaccountfor the negativeeffectof pollutionand tions to the existingaccounts. In this way,the modified human activitieson the environment. These approaches accountspreserve all existinginformation, and the sug- are more difficultto implement,since a metric must be gested changes can be ignored by users of the conven- devisedto valuethe damagedone by pollutionand envi- tional accounts who do not require the additionalenvi- ronmental degradation. Implementinga scheme based ronmentalinformation.Because of the close linkage to only on the measurementof physicalflows is far easier. conventionalaccounting structure, this discussionpro- However,even though a material balance accounting videsan overview of the conventionalincomeand product scheme may be useful to organize and displaycertain accounts,presents a modifiedaccountingstructure, and environmental information, by itselfit is not sufficientto emphasizes howclosely the proposedmodiFications fit the augmentthe coverageof the accounts. existingnationalaccounting concepts. The problem is that the elementsincludedin the ac- counting schemeshould reflect economicwelfare.If, at Theory of Environmental Asset Services the outset, an accountingscheme is set up that, as a matter of principle, precludes placing a value on the The firstissuethat ariseswhenone sets out to account elementsbeing measured,then such a schemeby defini- for the environment is to decidewhat aspect of the envi- tion saysnothing about economicwelfare.Materialsac- ronmentwillbe measuredor accountedfor. One possibil- counting, with its neutral valuationis similarlyneutral ity, reflecting the popular concern with air and water with respect to economicwelfare.Of course, inferences pollution,is to accountfor the generationamddisposition can be drawn about economicwelfarefrom material ac- of pollutingmaterials.Thus, following the lead of Ayres countsjust as from indexesof production.But to do so and Kneese(1969)and Leontief(1970),a systemcan be requires the aggregationof dissimilarentities measured devisedto trace all physicalflowsof materialsthroughout in differentunits (for example,tons of cement, barrelsof oil, and gallonsof water).The material accounts,them- selves, offer no guidance on how to do this aggregation. Note: Someofthe material in thischapter, a graph- including the accounting For its full implementation, schemeout- icalanalysis,is givenin Peskin (1989). lined below requires the measurement of all entries in 65 66 HenryM.Peskin valueterms to allowfor aggregationand the direct com- counting frameworkassumes that these decisions are parison of environmental with nonenvironmental entries. madewisely. Morespecifically, the chosen amountof pol- Oftenit is necessary to measuresuch physical information lutiongeneratedis assumedto be that whichmaximizes as the quantity of air and water pollutants emitted by profitsforpollutingproducersor whichmaximizes utility industrialcategory.Effortsto build materialbalance ac- for pollutingconsumers. countsand effortsto build the expandedaccountscan be Generally,the less pollution is generated or (what very complementary The objectivesof the two activities. amounts to the same thing in this simpleexample)the exercises are, in principle,however, verydifferent. less use is made of the disposalservicesof the environ- Rather than materialflows,this expandedschemeat- ment,the more costlyit is for the producer.Therefore,it tempts to cover flows of servicesgeneratedby environ- is assumedthat there are positivebenefitsto the polluter mental capital.It is based on two concepts:all income associated withhigherpollutionlevels,which,however, at originates from capital,and the physical environment is a somepoint begin to becomeless positive.Indeed,ifthese form of capital fundamentally similarto the other forms levelsget too high, the pollutionmaybeginto impedethe of tangibleand human capitalthat generate the income productionprocess(say,by affecting the workers'health), flowsalreadyaccountedfor in the conventional accounts. and thus the benefitsof pollutingmayevendecline.(Since The first concept,whichexpressesthe fundamental rela- the producer is assumedto be rational, however, such a tion betweenincomeand capital,has been wellaccepted situationwouldnot existfor very long.) in modemeconomicthought ever since it was originally Up to now,the focushas been on the benefitsof using stated (Fisher1906).The secondconcept,whilehardlyin environmental assets and on the associatedpollutionby the same centralpositionin economicthought,wouldnot the polluter.The other side of the coinis nowconsidered, be found to be objectionable by most economists.The namely,the "disbenefits" or damagesthat maybe associ- environment"is a form of social capital which society ated with the use of environmental assets.There are two must somehowmanage if it is to maximize its welfare" sorts of disbenefits. One is the familiar directdamagethat (Johnson1975, p. 321). Why this type of capitalneeds pollutionby one party can inflict on another. Air pollu- social management whileother types of capital,such as tion's effecton a person's health is a clear exampleof factoriesand machines,can rely on private management this sort of direct effect.By measuringthese direct dis- is central to the theory of environmental management. benefitsas negativebenefits,one can imaginea relation This theoryunderliesboth the proposedaccountsframe- betweenpollutionand disbenefitsthat, in general, indi- workand the proposedmethodsof valuation.' catesvirtually no disbenefitat verylow levelsof pollution, Although, as arguedabove,materialflowaccounting by a rapid increasein disbenefitat moderatelevelsof pollu- itselfdoesnot providesufficient information to add to the tion, and a satiation of disbenefitat very high levels of accounting of the elementscomprising economic welfare, pollution. Althoughthis pattern is realisticfor many pol- the material flow and the proposed asset service flow lutantsthat cause adversedirect healtheffects,other pat- approachare highlycomplementary. This is becausethe terns are possible.This pattern, however,along with the productionof anymaterial,whetherit is a product to be assumedform of the relation betweenpollutionand ben- sold or a wastematerialto be disposedof, can be linked efits,illustratesthe frequentsituationwherethe net social to the servicesprovidedby some specificasset. Just as benefitsof pollution(the sum of the benefitsand disbene- the productionof goods sold in the marketplacereflects fits)reachesa maximum at some positivepollutionlevel, the capitalservicesof the plant and machinesusecd in the (wherethe marginalbenefitsand disbenefitsof pollution manufacture of the goods,likewise the production of waste are equal)but wherepollutionis at a lowerlevelthan the products,such as smokeand spent processand cooling polluter finds optimal. Assuminga known relation be- water,reflectsa demandfor the capitalservicesprovided tweenenvironmental assetuse andpollution, optimalunits by the environment-services of waste disposal,cooling, of environmental servicerather than pollutioncould also and the provision of importantinputs, such as oxygen for be determined. burningor nutrientsfor crops. The secondtypeof disbenefit occurswhenthe pollution To understand the relationbetweenthe demandfor the or environmental asset use denies someone else use of servicesof environmentalassets and the generation of the environmental asset. For example,using a lake for pollutants,however, an importantprinciplemust be es- waste disposalmaydeny the use of the lake to someone tablished:the polluteralwayshas some choiceabout how elsefor gettingpotablewater or fishing.This second type much pollutantwillbe generated.Thus,whilesome pol- of disbenefitis referred to as an indirect disbenefitto lutionmaybe an inevitable consequenceof mostproduc- distinguish it fromthe direct disbenefits discussedabove.3 tion processes,the amount generated for each unit of The key feature of this type of disbenefitis that it will product can vary substantially, dependingon a multitude exist only if there is a finite amountof availableenviron- of decisionsaffectingproductionlevels,productiontech- mentalasset service. nique, and product mix. 2 The model underlying this ac- For the proposed accountingframework, three key el- A Proposed Environmental Accounts Framework 67 ementsare relevant.First, and most important,both pos- marginalunit sold.Allother so-called infra-marginal units itiveand negative benefitsare associated withany amount are valued at this same price (assumingthat the seller of pollutingactivity. Thus a singleaccountingentrywill, cannot practice price discrimination). To measure the in general, not be adequate to capture the effects of disbenefitsassociatedwith the use of environmental as- environmental asset use. Second,with a finiteavailability sets, marginal valuations should be used. 4 One important of environmental asset services,the identification of one advantageof marginalvaluations (besidesconsistency) is party (for example,industry)as the polluterand another that they provide a way to estimate whether observed party (for example,households)as the injured party is environmental assetuse is greater or less than the optimal not alwaysappropriate.The accounting system should use, whichmaximizes net benefits.At the optimal level, recognizethat any actor in the economymaybe using the marginalbenefitand disbenefit valuations are exactly environmental asset servicesto the detrimentof another equal;at levelsgreater than that, the marginalvaluation actor. A third element concerns the effect of the total of disbenefitexceeds the marginalvaluationof benefit; availabilityof environmental asset services.If the availa- and, at levelsless than that, the marginalvaluationof bility of such services is very great in relation to the benefitexceedsthe marginal valuation of disbenefit. These demandsplaced on the environment, and dLepending on latter situationscan be interpreted as conditionsfor too the methodchosento placevalueson these demands(see much and too little pollution,respectively. Althoughmar- below), it may be appropriateto ignore certain environ- ginalvaluations allowfor this interpretation,total valua- mental asset uses in the accountingsystern.Of course tions are usuallyeasier to estimate. treatingall environmental servicesas free goods and not Up to now, cost and valuationprinciples have been assigningany valueto them has in part contributedto used for the situationwhere a polluter creates a direct the current environmentalproblems. The point being disbenefit. For indirectdisbenefits, in additionto the total madehere, however, is that a judgmentmust be madeon benefit to party 1 (formerlythe polluter),the fact that a case-by-case basis on whetherassigninga zero valuefor party 2 (formerly the party sufferingdirectpollutiondam- accounting purposesis justified. age)enjoysa benefitfromthe remainingunits of environ- mentalassets must be accountedfor. Similarly, the indi- Valuation Concepts rect damage party 1 causes party 2 needs to be considered.To this value must be added the indirect For valuationmethods,a distinctionshould be made damageparty 2 causesparty 1 by denying party 1 various betweenthe cost of pollutioncontrolalreadyincurredby unitsof asset service.Againat the optimallevel,marginal pollutersand the potential cost to pollutersequal to the valuations of benefitsand disbenefitsare equal. As op- forgonebenefitif theyweredenied accesstcithe environ- posedto the analysis of directpollutiondamage,however, ment (whichequals the value to the polluiters of being the differencebetween benefit and disbenefit estimates allowedto pollute).The former cost is, in principle,al- cannot be interpretedas conditionsfor too much or too ready accounted for in the conventionaleconomicac- little pollutionor asset use. It can be said only that one counts (althoughit may not be clearlyidentifiedas a party'suse at the expense of the other party's use is too pollutioncontrol cost). The latter cost is not currently excessive to be sociallyoptimal. accounted for. Yet its estimationis important for the expanded accountingsystem, since it providesan esti- Investment and Depreciation mate of the value to polluters of disposalservicespro- videdby the environment. This cost, that is, the prospec- Conventional economicaccounting distinguishesbe- tive cost to the polluter of being denied any use of the tween the purchase of goods for consumptionand for environmentalasset, measures the value of a nonmar- investment. A further distinctionis made between gross keted factor input (the environmental asset service)just and net investment, the latter being equalto gross invest- as, say, the wage bill measuresthe value of a marketed ment less capitaldepreciation.In expandingthe conven- factor input (labor). tional accounts to include environmental asset services, As environmentalassets are used and pollutionpro- these distinctions should be preserved. In particular,in- duced, disbenefits are also produced; this is also ne- vestmentsthat increase the environmentalasset stock glectedin conventional accountingsystems.Most availa- should be accountedfor if this is not alreadydone in the ble measuresof these disbenefits rely on total valuations: conventional accounts. Similarly, there will be an entry the total valuesocietywould be willingto pay to avoid measuringany depreciation in environmental assets. The such disbenefits.But these total values are not entirely definitionsof investmentand depreciationmay not ex- consistentwith the valuationconcept used for marketed actly be the same as those used in conventional account- goods in the conventional national accounis. The usual ing,however, althoughthe definitions used are consistent valuationfor marketed goods is a price-times-quantity with economic theory. valuation,the price in questionbeingthat for the last or following Specifically, AlfredMarshall(1920), income 68 HenryM. Peskin (regardlessof whether it originates from marketed or equals consumptionplus net investmentand net invest- nonmarketed capital)is definedas the sumof currentand ment equalsgross investment less depreciation,however, potentialfuture additionsto well-being. The formation of net incomethus equalsgross incomeless depreciation.It capitalthat allowsfor both additionsto future income followsfrom equation3 that net incomeequalsiVo. Thus and the maintenanceof current income is gross invest- equation3 can be rewrittenas: ment. If current additionsto well-being are identifiedas consumption, gross incomecan be definedas consump- (4) = Cl + I1 + D, tion plus gross investment.Net income is simplycon- where C and II are consumptionand net investmentin sumptionplus net investment,where net investmentis year 1. In other words, gross investment less that portion of capital investment just necessaryto maintaincurrent levelsof consumption. Grossincome = net income + (value)depreciation Althoughdepreciationis defined conventionally as the = consumption+ net investment difference betweengross and net investment, one should depreciation + (value) also distinguishbetween valuedepreciation and physical = consumption+ gross investment. depreciation. This relation between income and depreciation was One reason that depreciation exists is that the physical dvlpdwtotayrfrnet h hscldsrc t geerte abiit ofcaita onumaleserics dclne developed without any referenceto the physicaldestruc- captal to generate consumae s ability*of decli aeps tion of capital. It is true that as capital wears out physi- over time. This loss in physicalability-physical epreci- cally,future Q's may fall, which explains why VI may ation-may also lead to a loss in the valueof the capital exceed V'. However, future Q's mayfallfor other reasons, stock-value depreciation; that is, valuedepreciation may such as a fallin the demandforthe capital'sservices.The reflectphysical depreciation.However, valuedepreciation Q's may also decline because of an inabilityto employ can alsoarise for other reasons.The valueof capitalcan fall becauseof a changein tastes for consumption Items thcailfuy.Ttisifapalomeensabra declinein labor serviceswouldalsobring about a decline producedby the capitalor simplybecauseof a changein in future Q's. interestrates. Moreover,in contrast to physical depreciation,value The relation betweenincome and the change in value depreciation,V. - VI, need not necessarilybe positive; depreciation can be shown as follows. A society's capital that is V c has value presumably because it generates a stream of . ouv in prince ecedion. Conven al goods and services,that is, income.Let V0 representthis tive and to refer to the case where V, exceeds Vnas a valueat the beginningof the year and Ql, Q2, and so capitalgain. This chapter does not followthis practice forth represent the servicesat the beginningof the next since it implicitlyassumes that the term "depreciation" and subsequentyears.AlsoQ, is definedas grossincome can onlymeanphysical depreciation.Rather,valuedepre- in year 1. ciationis decomposed into two components: the portion Vo can be relatedto the Q's as follows: of the differencebetween V 0 and V, that is due to actual Q __Q_ Q physical depreciation and the portionthat is due to other (1) VO= (1 + + (1+ *-- +y causes.The latter,if positive,willbe termed "capitalgain" and, if negative,will be termed "capital loss." Thus by at wherei is the rate of interest.Since V, the valueof Vo definition: the end of year 1, is simply (5) Valuedepreciation= physicaldepreciation minus Q2(++ + Qn+'Il 5 capitalgain or plus capitalloss. (1+t) (1+02 (1+1')+* Of course, the physicaldepreciation must be valuedto equation1 can also be written: makethis computation possible.Howthe unitsof physical Q, V Q,+ V loss should be valued-using the original price of the (2) VO (1+0 + T1 1 (1+i 1 capital,its currentprice,or some other price-is a matter of somecontroversy. Since the choiceaffectsthe measure fromwhichit followsthat of physical depreciation,it has importantimplicationsfor (3) Qi = ivo + (VO VI). both corporateaccounting (whichis not of concernhere) and for national accounting(whichis of concern).If the The term (Vo- V,), representingthe loss in valueof focusis on valuedepreciation,however, the implications the initialcapitalstock, can be identifiedas valuedepre- of choosing among alternative capital prices can be ciationoccurringin year 1, or D,. As before, gross in- avoided by estimatingvalue depreciationby successive come, Q, (using the Marshalldefinition),is defined as applicationof equation 1 one year apart rather than by consumptionplus gross investment.Since net income application of equation5. A Proposed AccountsFramework Environmental 69 Sources of Environmental Asset Depreciation the number of individuals is n, each of the identicalindi- vidualsis allottedzin of seashore. Like any other capital asset, the depreciationof the The implications for the asset's valuedepreciationde- valueof an environmental asset is due both to physical scribedin the secondexample are more complicated than depreciation and capitalloss (or gain).To illustrate these those illustratedin the first example.Even though the two sourcesof valuedepreciation, two assets are consid- amountof externaldamageeach user inflictson the other ered: one experiencesonly physicalreductionwhile the increases as the numberof individuals increases,the total valueof the other depreciatessolelybecause each user utilityfor all individuals as a group increases.Algebrai- perceives a reductionin the qualityof servicesprovided. cally,at the time the numberof individuals n is moderate, The formerasset mightbe a lake whoseonlyserviceis to the assumedutilityof each individual (for a Pareto opti- provide drinking water. It is assumedthat as drinking mal distribution) is u = u(zln).This utilitydecreasesas n wateris withdrawn, neithermanmadenor natural replen- increases.However, the total utilityfor all individuals is ishmenttakes place, so that the availability of drinking nu(z/n); this utilityincreases with increasesin n, although water is steadily reduced. 6 The second examplemightbe at a decreasingrate. In effect,previousseashoreusers are a stretch of seashoreof a givenlength.It is assumedthat worse off as n increases, but, because there are new the only serviceprovidedby this asset is recreationand, users, total utilitymayincreaseeventhough averageutil- further,that as the demandfor this serviceincreases,the ity falls.Total utilitymayalsodecrease,however, depend- qualityof serviceperceived by eachdemanderdiminishes. ing on the relativesize of an individual's total and mar- In the first example-the demand for the services of ginal utilitywith respect to n. The theoreticalchange in the first asset, drinkingwater,overtime by two users-in total utilityas n increasesis u(zln) - u'(zln)Jn,and this order to clearlydistinguish the two sourcesof valuede- can be either positiveor negative. preciation,each user's demandis assumedto be constant In sum, it is not self-evident that the valueof an asset overtime. Also,to keepmatters verysimple,the demands that does not deterioratephysically declinesas it becomes are assumedto be identical,and the capitalgain compo- more heavily used. A recreationalasset mayexperiencea nent in equation 5 is neglected. Each demander is as- capital gain even though it becomes heavilycongested sumed to have a maximumdemand of, say, X. When and even though each user becomes less satisfiedwith capacityis reducedbelow2X, the remainingasset is as- the servicesprovided.Whetherthe valuedepreciationof sumed to be equallyshared. Under the assumptionthat such an asset is positiveor negativedepends on a com- the demandfunctionsare identical,such amevenalloca- parisonbetweenthe declining utilityof each user and the tion is Pareto optimal:no other allocation can makeone increasingnumber of users. One importantbut perhaps user better off withoutmakingthe other worseoff. disquieting implicationis that if marginalvaluations are The implication for the lake's valueover time is quite used, a pristinelake has no valueuntil a point of conges- simple. Since the availability of drinking water is more tion is reached, that is, the point wheredemand curves than adequateforboth users, for a time there is no value start crossing.Actualphysical congestionis not required; reductionand hence no valuedepreciation,eventhough a demandcan existwithoutactualuse if the demandis in in real terms there is physicaldepreciation.However, the the form of a reservationfor future use. The existenceof valueof this physicaldepreciation is initiallyzero. Yet,as such an optiondemand maysufficeto givevalueto the soon as the lake's capacity is reduced t:) 2X drinking pristinelake. water units, the valueof the lake beginsto decline,and Nevertheless, manywouldfeel that the pristinelake has value depreciationincreases. That is, the value of the valueevenin the absenceof optiondemandor any other physical depreciation becomespositive. sourceof demand.Even if everyone acceptedthis view,it The second polar exampleis representedby the sea- wouldnot vitiatethe theoreticalstructurejust presented. shore. It is assumedthat there is an increasing numberof The keypoint is that the accounting systemdiscussedin identical individuals,each demanding the same fixed this chapteris intendedto coveronlyelementsthat affect length of seashore.To showthe effectof this increasing economicwelfare.Consistentwith this objective,valua- demandin a two-dimensional diagram,the individuals are tions are confinedonly to economicvaluations-not to dividedinto two groups of equal size. Three basic situa- valuations that mayhavereligious,ethical,or philosophi- tions arise: (1) when the number of individuals is small cal foundations.Unlikeother sourcesof value,the basis enough that their maximumdemand is less than the for economicvaluationis the interactionof demandand seashorecapacity,(2)when the number ef individuals is supply. moderate so that their maximumdemands just exceed seashorecapacity, and (3)whenthe numberof individuals Overviewof the National AccountingStructure is so large that their summedmaximum demandsgreatly exceedseashorecapacity. For the latter two casesa Par- To analyzethe implications of this theory of environ- eto optimal distributionis assumed:if capacityis z and mentalassets for the proposed modificationto the con- 70 HenryM. Peskin ventionalnationaleconomicaccounts,it is usefulto dis- Table 10-1. Input and Output Accounts cuss briefly national accounting concepts. 7 For for a HypotheticalEconomy illustration,this discussionfocuseson the U.S. national IndustryB accounts and concentratesprimarilyon the irrethod of IndustryA controlindustry) (Pollution Government accounting for the inputsand outputs of marketedenti- Input Output Input Output Input Output ties in production processes. The expanded accounting XBA XAB XAB XBA LC X framework plans to treat the inputs and outputs of envi- LA XAG LB XBG XAC ronmentaland other nonmarketentitiesin an analogous DA X, D, X. XBG manner. TA XAG TB XBG Since 1958 the U.S. national accounts haveconsisted -SA -SB of fivesub accounts:national incomeand product, per- PA PB sonal incomeand outlay,government receiptsand expen- Note:X is the outputof goods and services, L is labor,D is deprecia- ditures,foreigntransactions, and gross savingand invest- tion, T is taxes,S is subsidies, and P is profitor loss.The firstsubscript refers to the generatingindustrialsector (or government) and the sec- ment.The nationalincomeand productaccountincludes ond, if any,refersto the receivingindustrial sector. gross nationalproduct (GNP),net nationalproduct (NNP), and national income (NI)-the indexes that receivethe most publicattention as indicatorsof well-being. There- fore, the other accounts willbe ignored in the ensuing The right-handside of the account for firm A in Table discussion.Although these accounts are not insulated 10-1 shows the sales of A's output in the accounting fromproposedchangesin the treatmentof environmental period.The proceedsfrom these sales are dividedamong asset services,any effectson these accounts willbe re- severalinputsshownon the left-handside of the account. flected by changes in the incomeand product account. These includeX,,, the amount of firm B's output pur- Thus, few essentials are lost by focusingon just one chasedfor use in the accounting period; LA, the amount account,and the discussionis greatlysimplified. spent on labor; TA, the amount spent for indirect taxes The incomeand product account is a consolidation of (that is, all taxes excepttaxes on income);SA, any subsi- many individual accountingsof productiveactivities, the dies receivedby firm A (which,as shown,are valuedas bulk of whichare those of businessenterprisesand fed- negative inputs);and P4 , profit or loss.SincePA is deter- eral, state, and local governments. The consolidation mined as a residual,the left-handand right-handsidesof process can be illustratedby consideringa hypothetical A's accountalways balance.The inputside of the account economywhere productionis assumedto take place in does not show any capital account outlays. It accounts only two businessenterprises,A and B, and one govern- only for the inputs used up in the accountingperiods, ment.This economy does not engagein foreigntrade nor whereas capital goods by definition are used up over are there anyinterest chargesfor borrowing money.Also, severalaccounting periods. The portion of capitalthat is it willbe usefulfor later discussionif firmn B is assumed used up in the accounting period or depreciation(includ- to be a producerof pollutioncontrolequipment. ing other capital consumptionallowancessuch as acci- The dollarvalueof the outputof eachfirmin the period dental damageto capital)is designatedas DA.Againthe coveredby the account (usually one year) willbe repre- itemsthat makeup firmn B's input, shownon the left-hand sented by X, with subscripts indicatingthe destination side of B's account in Table 10-1, are defined analo- and the type of output. Actually, a firm is likelyto pro- gously. duce and purchasetwo types of output: goods that will The governmentproductionof goods and services in be used up or consumedwithinthe current accounting the accounting periodis XGG. The notationindicatesthat periodand goodsthat are used up overmanyaccounting the government is viewedas producinggoods and serv- periods. The formerare termed current goods, and the ices for its ownuse and not for other sectors. In conven- latter are termed capitalor investment goods. tional national accounting,because of the difficultyof Firm A's output of current goods is designatedby XAB, valuinggovernment output,XGG is set equal to the wages XAC, and XAG, representinggoods that willbe used up in and salaries paid to government employees, LG,plus its the accountingperiod by firm B, by consumers,and by purchases from businesses,XAG and X,,. The govern- the government, respectively. Expenditures for such goods mentalproduction account is thus verysimple. Govern- are called current account outlays. Firm A's oultputof ment transferpaymentsare not shown,since such trans- investment goods is designatedby XA. Expendituresfor fers do not reflect any new production in the economy. these goodsare calledcapitalaccountoutlays. Sincethese Similarly, taxes are not shown,since these are not consid- goods are not used up in the accountingperiod, the ered as inputs to government production.Such financial inputs of such goods to sectors A and B are not shown. itemsas taxes and transfersshowup only in the govern- Firm B's output-XBA,XBC,X,,, and XBG-are defined ment receipts and expendituresaccount.The consolida- analogously. tion or mergingof the three sector accounts where, by A Proposed Environmental Accounts Framework 71 ProductionAccount Table 10-2. Consolidated no capitalconsumption accounting is alsoa theme of this Economy for a Hypothetical chapter. Input Output Unfortunately, this simplifiedexposition failsto address LA + LB+ LG XAC+ XBC (consumption) severalcontroversial issues concerningthe ability of the PA + PI accountsto measurewell-being. For example,the classi- income National + XBI XAI (investmrrent') fication of many items as investment,consumption,or TA+ TB intermediate goods is not always self-evident.Manyitems -(SA + SBl) such as consumerdurablesare classified as consumption Netnationalproduct (government) XGG items when they could just as easily be classifiedas in- DA+ Di vestmentitems. Another issue concerns the failure to ChArgesagainstgross Gross national product consider anyportion ofgovernmental productionas inter- product national mediate,eventhough such government servicesas polic- Note:See the note to Table 10-1 for definitionsof the notation. ing and inspectionare often essentialinputs to business Entriesin boldrefer to the sumof all entriesabovethem. operations.A third issue concerns the fact that the ac- countingstructure and its aggregatesdo not revealhow any of the componentsare distributedamong members assumption,all conventional(that is, marketed) produc- of the population.A societyin which 10 percent of the tion takes place yieldsthe nationalincome and product populationenjoys90 percent of the consumption goods accountfor this simpleeconomy. This account,in effect, producedcould havethe same total GNPas another soci- picturesall the economy'sproductionas taking place in ety whereconsumption goods are much more evenly dis- one huge sector.The consolidation is performedbyadd- tributed.Fewwouldbelievethat both societiessharedthe ing A'sinputsto B's and the government's inputs,adding same levelof well-being. A's output to B's and the government'soutputs, and One feature of the national accounts that is reflected eliminating itemsthat appear in both the input and out- in the above simplified exposition is the limited role put totals. In this simpleeconomy, the itemsso eliminated households playas a producingsector. This limitedrole, are XAB, XB,I XAG, and XBG. Items that represent the in turn, reflects the preoccupationof the accountswith production of one industryfor use by another in the activitiesthat take place in well-definedmarkets and accounting period are termed intermediate goods.In the where productionis alwaysreflected in monetarytrans- United States and in the accountingsystemsof most actions. This preoccupationneglects, for example, the westernnations, such intermediategoods are not shown high portion of productiveactivitythat occurswithinthe in the consolidatedincome and product account, since household. 9 The fact that GNPfallswhen"a man marries their value is already reflected in the valueof the con- his housekeeper"is a curiositythat is highlyrelevantto sumption,investment,and the governmental production the treatmentof all nonmarketproduction,including,as itemsincluded. shallbe shown,the prospective treatment of the services Table 10-2showsthe resultsof the consolidation. The of the environment. principal national income and product aggregatesare definedby the groupingsindicatedby the entries shown Response of Conventional Accounts in bold. These entries are the sum of the items listed to Nonmarket and Environmental Activity abovethem. Thus, GNP is definedas total productionof goods and servicesfor consumption, investment,and the In recent yearsthe abilityof conventional accountsto government. 8 Since the consolidatedaccount must bal- reflect social well-beinghas been scrutinizedmore and ance, GNP mayalso be definedas the sum of lalbor pay- more. One can identifymuch of the problem as a failure ments, profits, indirecttaxes less subsidies,and depreci- of the accountsto reflect adequatelyeconomicyet non- ation. The sum of labor paymentsand profits alone is marketedentities. callednationalincome(Nl). It represents the sum of pay- Usingthe simpleaccounting framework just presented, mentsto factorsof production.The fact that there may it is possibleto be far more specificabout these inade- be other factors of production-such as the servicesof quacies.Since the focus of these efforts to modifythe the environment-forwhichpaymentsare not madeis, of accounts has been toward improvingtheir response to course,the subjectof this chapter. changesin the natural environment, the followingdiscus- NI plus indirecttaxes equalsNNP. NNP also equals GNP sion of the inadequaciesignoressuch failuresas the con- less depreciation.It thus providesa measure of output ventionalaccount'sinabilitiesto measure fullythe effect that accountsfor the fact that a certain portion of gross of changes in householdproductive activityor in the output must be set aside to replace deteriorationof the services of government capital. However,the analysis nation'sstock of capital.The fact that there mayalso be could easily be modifiedto cover these other nonmar- deteriorationin environmental capitalfor whichthere is keted entities. 72 HenryM.Peskin As manyhavenoted, a declinein environmental quality willbe necessaryto distinguish the effecton the accounts maybe accompanied by an increasein GNP. In this simple in the year the investment is made from the cumulative economy, increasesin, say,XAC could require industryto effectover time. increaseits loadingsof air and water pollutants.WNhat An increase in current account outlays for pollution many find even more bothersome is that the pollution abatementby business and government,that is, X. or itselfcould lead to an increasein both the leveland cost XBG, does not showup on the consolidated account.(They of certain services,such as medicalservices,whichalso are canceled out, since they are on both sides of the lead to a further increase in conventionally measured consolidated ledger.)However, the fact that such transac- GNP. Of course, if the pollutionwere bad enough,work tions betweenbusinessesare not showndoes not mean abilitymightdecline,leading to a fall in LA,LB,ancILC that there willbe no effecton the account aggregates. and a concomitantfall in GNP. The fact that under such The more labor that firmB devotesto producepollution dire circumstances GNP will movein the "right" direction controlequipmentto be sold to A, that is, XB, the less will,of course,do little to satisfythe critics. labor willbe availableto produce other goods, such as Althoughdeclinesin environmentalqualityare often XB4and XBG. Therefore,barringa sudden changein tech- accompanied by increasesin GNP, it does not necessarily nology, the increasein XA must be at the expenseof one followthat improvements in environmental quality must or more of the elementsof GNP. be accompanied by reductionsin GNP. The directionof The same result must occur iffirmA uses its ownlabor the movementof GNP or other account aggregates de- for pollutioncleanup.If A attemptedto maintainits pro- pends on howthe environmental improvement is brought duction of goods that show up in the GNP (XAc, X ,, and about. In the simple economydepicted in Table 10-1, XA) by reducing its production of intermediategoods, firm B, which was assumed to be in the business of XAB, firmB wouldhaveto reduce its output,since XABis manufacturing pollutioncontrol equipment,provides XBA B's raw material.The pollutioncontrolfirm B might try units of antipollution equipmentto firm A, XBG units of to maintainits productionof goodscounted in GNP (XBC, equipment to government, and XBC units to consumers. X,,, and XBG) by reducing its intermediateproduction, Suppose,in responseto further environmental degra- XBA.This possibilitycan be ruled out, since such a re- dation, consumersor the government decideto increase sponsewouldmean an increasein pollutionby A rather purchasesof antipollution equipment.In a fullyemployed than the postulateddecrease.Thus,divertinglabor either economythe postulated increase in XBCby consumers for the productionof current account,intermediatepol- must comeat the expenseof a reductionin XAC(thai: is, lution control equipment or for in-housecleanup must 1 a fall in consumptionof goods other than for pollution reduce the GNP." If, as is usuallythe case,however, most abatement), a reductionin XA,or X,, (that is, a reduction of the pollutioncontrol depends on the purchases of in investment, whichis equivalentto a reduction in sav- capital equipment,XB,,the short-term effecton the ac- ings),or a reductionin XGG (that is, a reductionin govern- counts is the same as it was above when the increased ment activity). Similarly, a postulatedincreasein XBG by pollution control outlays of consumerswere analyzed. government must, in a fullyemployed economy, be either The only short-termeffectwillbe on the composition of at the expenseof XAC, XBC', XAIXBI,or at the expenseof GNP, not on its level. other componentsofXGG, such as XAG or LG. Yet,overthe longterm the situationmightbe different, Although such reductionsmay changethe composition since changesin investment are likelyto cause changesin 10 of GNP and NI, it willnot changethe levelof GNP or Nl. other typesof output.Thus,investment that is divertedfor To the extent that investmentis reduced, NNP may rise environmental purposeswillresult in fewermachinesand slightly,since depreciationmayfall.(The remaining capi- less equipment to support ordinary production. Some tal maybe usedmore intensively, however, causingcapital economists haveestimatedthat for each 1 percent of in- consumption allowances to rise.) Of course, if there were vestmentso diverted,output, as measuredby NI, fallsby unemployed labor and capital resources,the increasein approximately 0.3 percent (Denison1979a, 1979b).Al- XBCneed not engender any reduction in other outputs, thoughinvestigators havedisagreed aboutthe exactamount thus allowing all the accounting aggregatesto rise. In- of the declinecausedby divertedinvestment, there is gen- deed, an expansionin employment and output has been eral agreementthat increasesin pollutioncontrol invest- associated with pollution control expenditures in the ment will have some dampeningeffect on the account UnitedStates (DataResources1979). aggregates, againmakingthese aggregates poor indicators The situationis much more complicatedwhen, as is of environmental improvement and overall well-being.12 often the case, businesses,rather than consumers,pur- chase antipollution equipment(Denison1979b).The ef- A Modified Accounting Structure fect on the accounts depends on whetherthe pollution abatementexpendituresare current or capital account The abovetheoreticalstructure suggestsboth a frame- outlays.Also, if the outlaysare for investment goods, it workfor introducingthe servicesof environmentalassets Environmental A Proposed AccountsFramework 73 into the conventional accountsand the principle;for eval- uct account is rather simple.Likewise, the modifiedac- uating these services.Basically, the framework assumes count shownin Table 104 is very simple. It contains that these servicescan be treated as unpaidfacl:or inputs those additional entries that accountfor the government's to either production or consumptionactivities.The ad- use of the environment,the resulting damage, and the verseeffectsof pollutionor of the denialof environrnental necessarybalancingentry. However,it also differsfrom servicesto others caused by the use of the servicesas the industrialaccountin that it displaysan entry account- 13 inputscan be treated as negativeoutput or damages. A ing for environmental depreciation.The implicitassump- balancing term is requiredto assure that the converntional tion is that all environmental assets are "owned"by the equality betweentotal inputsand outputs is maintained. government. The following set of accounts,modified to reflect these ideas, is rather similar to the conventionalaccounting structure outlinedin Tables 10-1 and 10-2.14 Although Households Table 10-2 showsthe consolidated account as a combi- nation of industrial and governmentalproduction ac- The conventional national accounts assume that very counts, here the consolidatedaccount is a coimbination little productiontakes place in households(primarily ac- of productionaccountsin four sectors: industry, govern- countedfor by nonprofitinstitutionsand the servicesof ment,household,and the environment (nature).To make domestics)(Table 10-5). The focus of the conventional them more understandable with the con- to those familiar accounts on activitiesthat reflect market transactions ventionalaccounts,additionalentries are shown,which, precludesconsideration of the outputs relatedto keeping to simplify the exposition, were neglectedin the accounts up a house,preparing meals,raisingchildren,and do-it- in Tables 10-1 and 10-2. There are no new entries for 16 Households yourselfprojects. are far more importantin current pollutioncontrol outlays,since these are already the modified accounts.Especially in developingcountries, included in the conventional accounting of costs.Asnoted householdsaccount for a substantialportion of environ- above, however, it probablywould be usefulto identify mental damageto water becauseof direct dischargesof these costsseparately, as has been done by the Bureauof sanitarywastes."7 Economic Analysis (U.S.Departmentof Commerce) since Households are uniqueamongthe producingsectors in 1972. that most of the environmental damagecausedby house- holds(as a result of their consumptionof environmental Industrial Sector services)are inflictedwithin the householdsector itself. In contrast, industries and governmentstend to inflict The typical industrial account shown in Table 10-3 damageoutsidetheir ownsectors. containsthree new entries that would ordinarilybe ab- sent from a conventional accountof the industry'sinputs and outputs.In addition,capitalconsumption allowances Nature includenatural resource and environmental depreciation as wellas ordinarydepreciation.Item10 is an accounting The modifiedaccounting systemdiffersmost markedly of the environmental services,and item 15 is an account- fromthe conventional systemin its inclusion of nature as ing of damages-not just to consumers,but to any agents a separate sector (Table 10-6). Nature is shown as the in the economythat are damaged,includingother busi- primarysourceof all environmental asset servicesand as nesses. Becausethey are "free," environmental services the final consumer of environmentaldamages. Nature are like a subsidy to the industry.Therefore,they are also must be includedbecause it generates a substantial entered as a negativeinput. Item 11 is the arithmetic portion of environmental damage.For example,a large difference between items 15 and 10. It ensuresthat the portionof dissolved solidsin water havea natural origin, modifiedaccounts balance. Since it is defined as the and, on average,naturallygeneratedparticulatesand ni- difference betweenthe servicebenefitof the environment trogen oxides(other than NO 2) greatly exceed the man- and the disbenefitof environmental damage,it has been madeproductionof these air pollutants. named net environmental 5 The modified benefit." indus- Althoughsome may havea philosophical objectionto trial account input and output totals equal the conven- the idea of nature as a polluter,the concept is required tional input and output totals less the absolute valueof for practical reasons. Availableestimates of damages environmental damage. caused by air and water pollutants cannot distinguish between damages from offensiveresiduals that have a Government human origin and those with a natural origin. Rather than attribute all the damageto nonnaturalcauses, it is of tne standard As is suggestedby the abovediscussion more accurate to prorate the damagesbetween the two governmental national accounts, the conventional prod- sources. 74 HenryM. Peskin Table 10-3. Industrial ProductAccount for a Typical Sector (I) Input Output 1. Purchasesfromother industrialsectors 12. Salesto privatesector (currentaccount) 2. Compensation of employeesand proprietors(incl. a. To other industries rental income) b. To households 3. Profitsafter inventoryvaluationand capitalcon- c. Exports sumptionadjustment 13. Salesto government 4. Net interest 14. Salesfor grossinvestment 5. Imports 6. Transferpayments 7. Indirecttaxes 8. Subsidies received(-) 9. Capitalconsumption allowances Gross industrial sector input Gross industrial sector output 10. Environmental services(-) damages(-) 15. Environmental a. Air a. Air b. Water b. Water c. Land c. Land 11. Net environmentalbenefit(1.15-1.10)a Modified gross industrial sector input Modified gross industrial sector output L10, a. 1.15, item15,item10,andsoforth,account andso forth,means I. Table 10-4. GovernmentalProductAccount (II) input Output 1. Purchasesfrom industry(1.13) goods and services 7. Governmental 2. Compensationof employees 3. Imports Governmental input Governmental output 4. Environmentaldepreciation damages(-) 8. Environmental 5. Environmentalservices(-) a. Air a. Air b. Water b. Water c. Land c. Land benefit(11.8-11.5) 6. Net environmental Modified governmental input Modified governmental output Table 10-5. HouseholdProduct Account (III) Input Output 1. Purchasesof intermediate goodsfromindustry 8. Servicesto households (1.12.b) a. Nonprofitinstitutions 2. Compensation of empLoyees and proprietors b. Domestics 3. Imports 4. Surplusof nonprofitinstitutions 5. Capitalconsumption allowances Gross household input Gross household output 6. Environmental services(-) damages(-) 9. Environmental a. Air a. Air b. Water b. Water c. Land c. Land 7. Net environmentalbenefit(111.9-111.6) Modified gross household input Modified gross household output A ProposedEnvironmental AccountsFramework 75 Table 10-6. Natural Account (IV) Input Output 1. Environmental damages(including those naturally 2. Environmental services generated) 3. Net environmental benefit a. Air (IV.1-lV.2) b. Water c. Land Natural sector input Natural sector output Consolidated Income and Product Account may not be interested in the modifications to simply ig- nore them. Thus, for example, while the modified ac- The modified accounts shown above can be consoli- counts show environmental depreciation as a negative dated into a modified income and product account, as in adjustment (item 9) to NNP, it is added back (item 11) to Table 10-7. The procedure is the same as that used to leave the conventional measure of GNPunchanged. Ar- consolidate the accounts shown in Table 10-2. As before, ranging the entries in this way should alleviate the fears all flows within sectors have been eliminated. That is, all of those who object to modifying the conventional ac- items appearing on both sides of the consolidated ac- counts on the grounds that such modifications destroy count are eliminated. Also as before, househo'ldsare not the integrity of the accounts. included in the consolidation; nor is the nature account (except for natural sources of environmental damage). The Modified Account Aggregates Although nature is viewedas the source of environmental Inspection of the modified consolidated account indi- services and the consumer of environmentaldamages, the cates that modified GNP equals conventional GNP less en- proposed accounting framework does not vievw nature as vironmental damage. Actually this relation is an identity: undertaking production activities. It is thus excluded from it is necessarily true because of the way the entries are the gross production account. arranged in the accounting structure. Several other ar- The new entries have been arranged to preserve the rangements are possible, however,each leading to its own conventional account entries, which will enable those who formula relating the conventional GNP to a modified GNP. Table 10-7. Consolidated National Income and'ProductAccount (V) input Output 1. Compensationof employeesand proprietors(incl.rental 14. Personalconsumption(1.12.b+ 111.8) income)(1.2+ 11.2+ 111.2) 15. Grossprivatedomesticinvestment (1.14) 2. Profits after inventory valuation and capital consumption 16. Exports (1.12.c) adjustment(1.3) 17. Imports(-) (1.5+ 11.3+ 111.3) 3. Net interest(1.4) 18. Governmental goodsand services(11.7) National income 5. Transferpayments (1.6) 6. Indirecttaxes (1.7) 7. Subsidies (-) (1.8) discrepancy 8. Statistical Net national product 9. Environmental depreciation (-) Modified net national product 10. Capitalconsumption(1.9+ 111.5) 11. Environmentaldepreciation(+) Charges against gross national product Gross national product 12. Environmentalservices(-) (1.10+ 11.5+ I11.6) 19.Environmentaldamages(-)(1.15 + 111.9 + 11.8 + IV.1) a. Air a. Air b. Water b. Water c. Land c. Land 13. Net environmentalbenefit(V.19-V.12) Charges against modified gross national product Modified gross national product 76 HenryM. Peskin To showthis, the following notation is first defined: the first three, since the relation between the environ- ment and conventional GNP has alreadybeen discussed. VA = chargesagainstconventional GNP or valueadded GNP = conventional GNP Option 1: GNP' = GNP - ED GNPi= modified GNP, definition i (i = 1, 2, 3, or 4) ES = environmental services It was demonstrated above that the conventionalac- NEB = net environmental benefit count aggregatesdo not alwaysrespond to changes in ED = environmental damage. environmental qualityin a manner that wouldmakethese aggregates acceptableindicatorsof well-being. GNP tended Sincethe left- and right-handsides of the consolidated to increasewith environmental deterioration,and efforts accountsmust balance,the following identityholds: to improve the environment are often reflectedby reduc- (6) VA - ES + NEB = GNP - ED. tions in GNP, particularlyif these effortswereundertaken identityimpliesthe following Asno,this definition byreallocating businesscurrentaccountinputsor shifting As noted,GNP investment. Clearly,the abovedefinitionof modifiedGNP of modifiedGNP: seems to perform much better as an indicator of well- (7) GNPI = GNP - ED. 1) (Definition being. GNP' appears to move correctly with respect to changesin ordinaryGNP and to changesin environmental Accounting arrangementsare somewhat arbitrary,how- quality.Perhapsthis is whythis modification to conven- ever,and other arrangements are possibleas long as the tional GNP was recommended by Olson (1977).Yet, this accountsbalance.For example,by addingES and ED to first definitioncoversonly part of the environmentalre- both sides of equation6 and noting that NEB = ES - lation.The seconddefinitioncoversanotherpart. ED, a newidentitycan be formed: (8) VA + ES = GNP + ES Option2:GNP'=GNP+ES whichleads to a newdefinition: The theoreticalanalysis behindthe suggestedmodified accounting frameworkdemonstrated that there was a beneficial environmental service associated with any ob- addingEs and EDto both sidesof equation6 Similarly, served environmentaldamage. This service, being un- again notingthat NEB= ES -lED producesa t1iird and priced and apparently"free,"does not showup directly adagin n of definitionnotingta modifiedGNEr GNP: in conventionalGNP. The second definitiondirectly ac- countsfor this unpricedinput. Its use as an indexof well- 3 (10) GNP = GNP + NEB. 3) (Definition being would have interesting and perhaps controversial implications.For example,the differencein incomebe- first addingES to both sides of equation6 and Finally, tween an unindustrial,developingsociety in a tropical then subtractingNEB from both sides producesa fourth climatethat generatesenvironmental servicesin the form of warmth and abundant, freely availablefood and an 4 (ll) GNP = GNP. 4) (Definition industrialsocietyin a cold climatethat requiresa highly sophisticatedagricultural 2 systemmaybe far less if income Thus,modifiedGNPcan be definedalternatively as con- is measured by GNP , rather than ordinary GNP. (The ventionalGNP less environmental damage,as conventional differencemightalso be less under the first definitionif GNP plus environmental services,as conventionalGNP pIus the industrialsocietywere alsothe more polluted.) net environmental benefit,or simplyas equalto conven- 2 However, GNP is prone to possibledouble countingof tionalGNP. These definitions are by no meansequivalent, environmental services consumed by business.Whilethese but they are all consistentwith the modifiedaccounting servicesmaynot be accountedfor directly,they may be structure discussedabove.The pros and cons of these reflectedin profits, whichare capturedby ordinaryGNP. alternativesare discussedin the next section. For example,a businessthat can disposeof its wastesin the ocean has a distinct advantage over a competing The Environment and the Modified Accounts: businessthat must treat its wastes.The opportunityto Options for ModifyingGNP use the ocean's disposalservicemay show up as an in- creased profit rate for the business. For the national The relation between the modifiedaccounts and the accountantto add in an amountequalingthe valueof the environment can be discussedin terms of the modified ocean servicewould,in this example,be superfluous. 2 GNP conceptsdefinedin the previoussection.Since the One interesting aspect of GNP concerns its behavior fourth definitionof modifiedGNP is exactly the same as with respect to pollution control expenditures by busi- conventional GNP, however,the discussion need only cover ness. As noted, conventional GNP either is unaltered or A Proposed AccountsFramework Environmental 77 declinesdependingon whetherthe expenditureby busi- dualityand the fact that the benefitsof pollutionreduc- ness is on capital or current account and on whether tion are rarely gained withoutcost: some portion of the capital outays for pollutioncontrol divert capital from benefitsof environmental servicesusuallyhaveto be for- more productiveuses. Assuming full employment, how- gone. 2 ever,GNP willalwaysdeclineas pollutionconbtolexpen- As noted from Table 10-7, in this framework environ- dituresincrease.According to the theorybehindthe mod- mentaldepreciationmodifies only NNP, but not GNP. For ifiedframework, pollutioncontrolexpenditures 'meam that this reason environmental depreciationwas neglectedin marketed goods and services are being substitutedfor the foregoing discussionof modifiedGNPconcepts.Since 2 environmental services.Thus, since ES willdecline,GNP many prefer NNP to GNP as an aggregate measure of will also decline. Some may feel that this result, along economicperformance,however, it is possibleto recast 2 with the potentialfor doublecounting,makesCNP a less all the previousdiscussionin terms of NNP. By simply desirableindicator of well-being than GNP'. However, its subtractingcapital consumption allowances and environ- focuson the benefitsof Esis a strongpoint in its favor. mentaldepreciation (items10 and 11 in Table10-7)from both sidesof equations6 through 11, all the conclusions Option 3: GNP3 = GNP + NEB = GNP + ES - ED can be restated for NNP.Thus, for example, NNPI = NNP 2 - ED, NNP = NNP + ES, and so forth. The above This definitionof modifiedGNP appears to be a com- hold as well. inequalities 2 promisebetweenGNP' and GNP and shares the strengths and weaknesses of both measures.As an indicatorof well- Notes being it appears to move in the correct direction: in- creasesin ES and decreasesin ED implyincreasesin GNP3. management 1. Environmental hasfound theory into its way 3 Yet there are some circumstances under which GNP has texts, but one ofthe best expositions several book is the seminal in movingin any direction. In the absenceof difficulty byKneese andBower(1968). technologicalchange,decreasesin environmental damage input-output 2. Simple models, as a whichviewpollution by business, ED, must invariably be accompanied by de- by-productproduced in fixed proportion to salableproduct, creasesin environmental servicesto business,ES. Thus, neglectthis importantprinciple.The earliestexampleof such a under policies of pollution control, NEB may remain es- modelis Leontief(1970). 3. Both directand indirectdisbenefits can occursimultane- sentially unchanged. For this reason, it may not be very os effective as an indicator of well-being after all. If D and ously. 4. Marginal valuations equal totalvaluationsless consumer's ES are valued using marginal valuations (as described surplus. under "Valuation Concepts," above,) however, GNP3 can 5. That is, if physicaldepreciation is Dp and capital gain is convey important information beyond that of the other G, the decomposition of value depreciation requiresthat V, = two measures of modified GNP. For considerations of V, - Dp + G or V/,- V1 = Dp - G. whether any of the modified GNP concepts are good indi- 6. Of course, in practice the availability of drinking water cators of social well-being,total valuations of environmen- may be reduced for other reasons, notablyby poisoningfrom tal services and damages are of more interest that mar- waste products. To keep the analysis simple, however,it is ginal valuations. However, marginal valuations provide a assumedthat the lake providesonlyone service-drinking wa- piece of valuable policy information. As described above, ter-and not a wastedisposalservice. if the marginal if th margnal vluatins valuations OfEs an ED ae thesame7. of ES and ED are the same For a more detailed discussion seRglsadRgls(96 90 of n accounting concepts, eateto (neglectingthe minus signs), the allocation of the services see Ruggles Commerce and Ruggles(1956;1970)and U.S.Departmentof (1954). of environmental capital is optimal in the sense that any 8. This simple economydoes not includea foreignsector, other allocation lowers social well-being.Thus, if marginal nor are there any interestpayments.If these were included,net valuations are used (and if environmental depreciation is exports (exportsless imports)wouldalso appear on the right- neglected), an optimum allocation occurs wherl ES = ED hand side of the consolidated account and net interest on the or, equivalently,when NEB equals zero or when GNP3 = left-handside. 3 GNP. If NEB were negative or GNP < GNP, well-being 9. One implication of this household production is that many would improve if ED were decreased. Such a policy rec- consumergoods are really intermediatein nature and thus ommendation to reduce environmentaldamage would not contributeonlyindirectly to well-being.See Hirsch (1976)for a be very controversial.However,the analysis also indicates gooddiscussion of this issue. that ifNEBwerepositive,orGNP' > GNP,theremay10. This statement assumesthat the economywill remain that lif NEB were positlve, or GNP > GNP, there may be fullyemployed in spite of these shifts in output. If factors of too little environmental damage for social optirnality.The productiondo not shift easily-as maybe the case in the real concept of too little environmental damage is a natural world-GNP mayfall. consequence of the fact that environmental asset services 11. The reductionin the right-handside of the consolidated contribute to well-being just as does the reduction in accountin Table 10-2must be offsetby an equal reductionin 3 environmental damages. GNP explicitly recognizes this somecomponents on the left-handside. Sincethe total amount 78 HenryM.Peskin of labor is fixed,either profits, indirect taxes, or depreciation . 1979a. Accountingfor SlowerEconomicGrowth. Wash- must be reduced. ington,D.C.:The BrookingsInstitution. 12. See Christiansenand others (1980) for a summaryof . 1979b."Explanations of Declining Productivity Growth." estimates of the effectof pollutionregulationon the economy. Survey of CurrentBusines59(8,part 2, August):1-24. 13. To avoid double counting, these damages should be Fisher, Irving.1906. The Natureof Capitaland Income. New measured net of damagesalreadyreflectedin any reduced pro- York:Macmillan. ductioncausedby pollution-related productivity losses(for ex- Hirsch,Fred. 1976.SocialLimitsto Growth. Cambridge, Mass.: ample,effectsof air pollutionon workerhealth).(RobertRep- HarvardUniversity Press. petto calledattentionto this point.) 14. This sectionis basedon Peskin (1976)and Peskin and Johnson,Harry G. 1975. On Economicsand Society.Chicago, Peskin(1978). Ill.:University of ChicagoPress. 15. Net environmental benefitis shownas the difference be- Kneese,AllenV., and Blair T. Bower.1968. ManagingWater tweenthe environmental damagesentry and the services entry. Quality:Economics, Technology, Institutions. Baltimore, Md.: Sincedamagesand servicesare entered negatively, however, it Johns HopkinsPress for Resources for the Future. actuallyis equal to the absolutevalue of the servicesless the Leontief,Wassily.1970. "Environmental Repercussions and the absolutevalueof the damages. EconomicStructure: An Input-Output Approach." The Re- 16. The one majornonmarketactivityassociated withhouse- view of Economicsand Statistics52(3,August): 262-71. holds that is includedin the accounts-the imputation for the Marshall,Alfred.1920. Principles of Economics.8th ed. Lon- implicitrents from owner-occupied housing-is includedin the don:Macmillan. businesssector. Olson,Mancur.1977. "The Treatmentof Externalitiesin Na- 17. In the modified system,seweredhouseholds are not con- tionalIncomeStatistics."In Lowdon Wingoand AlanEvans, sideredto pollutethe environment. Sewered wastesare consid- eds., PublicEconomicsand the Qualityof Life. Baltimore, ered inputs to municipaltreatmentworks,an industrialsector, Md.:Johns HopkinsUniversity Press for Resourcesfor the whichis creditedwithany resultingenvironmental damage. Future. Peskin,HenryM. 1976. "ANationalAccounting Framework for References Environmental Assessments."Journal of EnvironmentalEc- onomicsandManagement 2(4, April): 255-62. Ayres, Robert U., and Allen V. Kneese. 1969. "Production, - . 1989. "Accountingfor NaturalResourceDepletion and Consumption, and Externalities." American EconomicRe- Degradationin Developing Countries."Workingpaper 13. view 59(3,June):282-97. EnvironmentDepartment,World Bank, Washington,D.C. Christainsen, Gregory,Frank Gollup,and Robert H. Havemnan. Processed. 1980. "Environmental and Health-Safety Regulations,Pro- Peskin,HenryM.,and Janice Peskin. 1978. "The Valuation of ductivityGrowth,and EconomicPerformance."Assessment NonmarketActivities in IncomeAccounting." Review of In- report preparedfor the Officeof Technology Assessmentand comeand Wealth24(1,March):71-91. the Joint EconomicCommittee of the U.S. Congress.Froc- Ruggles, NancyD., and RichardRuggles.1956. The Designof essed. EconomicAccounts. NewYork: ColumbiaUniversity Press Data Resources, Inc. 1979. "The Macroeconomic Impact of for the NationalBureauof EconomicResearch. FederalPollutionControlPrograms:1978Assessment." Re- Ruggles,Richard, and Nancy D. Ruggles. 1970. NationalIn- port submittedto the Environmental ProtectionAgency and come Accounts and Income Analysis. NewYork: McGraw- the Council on EnvironmentalQuality,Washington,I).C. Hill. Processed. U.S. Departmentof Commerce. 1954. NationalIncome,1954 Denison,EdwardF. 1971. "WelfareMeasuresand the GNP." Edition. Supplementto the Survey of Current Business. Survey of Current Business51(1,January): 1-8. Washington, D.C.:U.S.Government PrintingOffice. EnvironmentalAccounting and the Systemof National Accounts Peter Bartelmus An importantoutcomeof the 1972 U.N. Conference on less clear how "sustainability" can be definedoperation- the HumanEnvironment in Stockholm was to affirmthat allyso that indicatorscan be developed that signalsignif- environmental problemsare causedby highlyaccelerated icant deviationsfrom the sustainable path of develop- economicgrowthas well as by activitiesinduced by an ment.' It appears that politicians in most countries actual lack of development. A broader viewof environ- continueto base their decisionson the assumptionthat mental damage was also advanced,which included, be- overalleconomicand social welfarerises and falls with sides the dischargeof toxic substances,the degradation the popularmacroindicators of gross domesticor national and depletionof natural resources. An integrated and product, GDP or GNP. In fact, these indicatorsare usually coordinatedapproach to developmentplanning, which taken to moveparallel with aggregateincome,which is includedsafeguarding the natural resources of the earth obtainedbymakingan allowance for the wear and tear of for the benefit of present and future generations,was capitalassets used to produce output and corresponding proclaimedin the "principles"of the conferencereport income.As far as the producedcapital is concerned, an (United Nations1973). elementof sustainability is thus introducedin the defini- Eight years later the WorldConservation Strategyad- tion of nationalincome.This approachreflects the Hick- vocated the "achievementof sustainable development sian view of income as a practical guide for prudent throughthe conservation of livingresources"as its basic conducttowardconsumption, whichshould not exceed a aim (IUCN1980).The International Development Strategy certainlimitbeyondwhicha person or a populationwould for the Third U.N.Development Decadealso referredto be impoverished (Hicks1946,p. 172). the "need to ensure an economicdevelopment process The concept of capital maintenancehas not been ex- whichis environmentally sustainableover the long run" tended to natural and human capital assets in national among its goals and objectives(United Nations 1981, accounting.As a result,in the case of natural assets,the para. 41). Duringits 38th sessionthe U.N. GeneralAs- degradation and depletionof the naturalenvironment and semblycalled upon the World Commission on Environ- its resourcescontribute to illusionary income flows that ment andDevelopment to proposelong-term environmen- cannot be maintainedin the long run. Moreover, expen- tal strategiesforachieving sustainabledevelopment bythe ditures by governmentor householdsfor "regrettable" year 2000 (United Nations 1984b).Accordingly, sustaina- measuresto counteractdeterioratingenvironmental con- ble development is the all-pervading themre of the Com- ditions actuallyincrease national product and income. mission's report (WorldCommission 1987). Measuresof economicwelfarewere therefore advanced Although there is generalagreementon the desirability that purported to correct the misclassification of regret- of sustainableeconomicgrowth and development,it is table expenditures as final and that madeallowancesfor importantnonmarket activities,environmental degrada- tion, and the depletionof natural resources.Best known are perhaps the pioneeringeffortsby Nordhausand To- Note: The authoris a staffmember Nations. of the United bin (1972),made popular by Samuelson'stextbook as Theviews herearehisownandnotnecessarily expressed those "net economicwelfare" or NEW (Samuelson1980, p. Nations. ofthe United 183). 79 80 Peter Bartelmus At the requestof the U.N.Committee for Development Europetook the initiativeto developa systemof environ- Planning,the U.N.StatisticalOffice(UNSO) criticallyre- ment statisticsthat would complement the already exist- viewedthe concepts,methodologies, and empirical appli- ing systemsof economicstatistics (the SNA) and social cations of these measures.The reviewconcludedthat and demographic statistics (the System of Social and considerable conceptual and measurement problemsmake Demographic Statistics,SSDS) (United Nations 1975). It estimatesof the valueof environmental damage "essen- soon becameapparent, however, that the currentstate of tially exercises for multidisciplinary research and experi- knowledge about the environment and its statisticalmeas- ments, not for routine collectionof statistics,"and that urement, as well as widelydifferingenvironmental con- difficultiesof agreeingon the scope, concept,and meas- cerns and priorities, did not permit an internationally urementof welfarewouldrender such approaches"inap- applicable statisticalsystemto be established.Therefore, propriate for officialand especiallyinternational use" under the guidanceof the U.N. Statistical Commission (UnitedNations1977b,pp. 54 and 66). The environment and with the financialsupport of the U.N. Environment statisticsprogramof the UNSO focused,therefore,on de- Programme (UNEP), the UNSO developed a flexibleFrame- velopingphysical statistics and related indicators (see work for the Developmentof Environment Statistics "Environment Statistics,"below).A significant limitation (FDES) (UnitedNations1984a).Since the FDES itselfdoes of such data is that they lacka commonnum6raire, which not recommendstatisticaldefinitionsand classifications, would permit aggregationacross broad sectors of the no direct linkagethrough commonconceptsand classifi- environment. Despiteits limitations, GDP thus continues cationswas establishedwith the SNA or other statistical to be the mainindicatorof economicsuccessor failure. systems.2 The joint UNEPIWorld Bank workshopsset out, there- The FDESis currentlybeing expandedinto a series of fore,to reexamine of physical the feasibility and monetary technicalreports on "Conceptsand Methodsof Environ- accounting and concentratedon the fieldof environment ment Statistics,"whichwillproposedefinitionsand clas- and natural resources. This field appeared to be better sificationsfor statisticalvariablesand indicators of high researchedand easier to assessthan the wholegamut of priority.Becausethese statisticsincludeindicatorsof re- welfareeffectsoriginallyaddressedby economicwelfare source depletion and environmentaldegradation,their measures.A consensusemergedin the workshopsthat use for establishing resourceand environmental accounts enoughprogresshad beenachieved to link environmental in physical terms willbe addressedspecifically in a report accounting to the standard Systemof NationalAccounts on "Statistics of the NaturalEnvironment." These meth- (SNA)(UnitedNations 1968) and to include certain as- odologieswill be applied at the regional and national pectsof environmental accounting in the ongoingrevision levelsin a GlobalProgramof Environment Statistics(U.N. of the SNA. This chapter examinesthe treatmentof envi- StatisticalCommission 1987, p. 29). ronmental issues in the SNA and reviewsthe main ap- proachesto resource and environmental accountingfor Materials/Energy Balances possiblelinkageor integration with the SNA. Closelinkageto the SNAhas been attempted in more Environment Statistics and Physical Accounlting selectiveapproachesto accountingfor flowsof materials and natural resources.The uNso developeddraft guide- The close interactionsamongenvironment, population, lines for statistics on materialslenergybalances (MEB), naturalresources,and development requirean integrated whichwere seen as a moduleof a larger systemof envi- approachto planningand policyformulation,which in ronment statistics (United Nations 1976). The primary turn need to be supported by comparable social, eco- purposeof the MEB is to trace the extractionand trans- nomic,and environmental data. On the one hand, envi- formation of materialsand energyfrom natural resources, ronment statisticssystemsattempt to compileraw data through varioussuccessive stages of processing,to final from a multitudeof sources and to present them in a use, and thence back to the environmentas waste or, from mulitud of surce andto prsentthemin a alternatively, to secondary use. Compatibility with the SNA coordinatedmannerin statisticalcompendia such as year- iseacived b usindits ustandrdpateboles such asdo books or bulletins. Further aggregationand more rigid is achievedby using its standard categories,such as do- presentation of the stocks and flows of natural resources mestic output and consumption, imports, and exports, in physicalterms are, on the other hand, the objective of and its classification of economicactivity. Contraryto the resourceaccountsand balances. conceptsof market transactionsand monetaryvaluation used in national accounting,physical stocks and flows and materials/energy transformationprocesses are pre- Environment Statistics sented in such balances. The U.N.StatisticalCommission consideredthe MEB to At the international for European level,the Conference be an interestinglong-termapproach,but too ambitious Statisticians(CES 1973)of the EconomicCommission for forshort-termimplementation becausecountriesstilllack Environmental Accounting and the System of National Accounts 81 the necessarystatisticalcapabilities.As a consequence, mony"approach is more ambitiousin its attempt to in- only the energypart of this approachwas further devel- clude ecological processesthat are not directly affected oped in balancesthat showenergyflowsfromthe produc- by human intervention,that is, interactions among the tion of primaryenergy,through conversion processes,to physicalcomponentsof the environmentand its biota the stage of finalconsumption(UnitedNations1988). (INSEE 1986a;see also Theys, Chapter7). A work programto standardizedefinitionsand termi- nology for mineral resources was initiated by the U.N. Environment and Natural Resources in the SNA Committee on NaturalResourcesand later transferredto the Statistical Commission. The commissionrequested Commonto all the above approaches is the use of the UNSO to further developmineralconsumptionstatis- physical units, which permits aggregationonly in very tics and raw materialbalances (including the secondary limited areas as, for example,in the energy sector by recovery of metals), provided the necessary resources means of conversionfactors.Physicalaccounts and the could be made available.Such resources could not be indicatorspresented in their framework assess resource found, however,and work on this program has been availability, use, and overuse,and they are thus important suspended, tools for managingnatural resources. However, they are only an intermediatestep in the overallassessment of the national resource base, which is required to formulate and evaluateresource policiesthat are compatiblewith general development policies(Repetto 1986). To calcu- In focusingon processesof resourceflowsthroughthe late overallmeasuresof economicperformance,a com- economicsystem,the MEB can also be consideredas a mon numeraire,such as the monetaryunit of national physicalextensionof the input-outputtables of national accounting,is needed.Therefore,aspectsof the environ- accounting.These modelscan incorporateresource re- ment that are alreadycoveredby the SNA are examined quirements and wasteresidualoutputs,whichreflectsthe belowbefore any further methodologies of monetaryen- fact that the materialsienergyinputsand outputs for the vironmental accountingare described. economymust always balance.However, detailedclassifi- cationsof productionprocessesthat providefor a further Flow Accounts breakdownof the relativelyheterogeneousclassification by industrieswould be needed to obtain more stable The basic objective of the SNA is to provide"a compre- technical coefficientsof resource use, production, and hensiveand detailed frameworkfor the systematicand residuals. integratedrecordingof the flowsand stocks of an econ- Although the SNA providesfor the full integrationof omy"(UnitedNations 1968,p. iii).No explicitreference input-outputtables, country tables were oftenicompiled to the environment or natural resources is made in any separatelyfrom national accounts becausethey focused of the core flowaccountsdescribedin the "blue book" of on specificanalyticaluses. A future handbookon input- the SNA. Variousactivities listedin the internationalstan- output statisticsand the current reviewof the SNA as a dard industrialclassification (isic) refer, however,to the wholewilladdressproblemsof better integrationof input- use of natural resources such as agriculture, hunting, output practicesinto the SNA framework.For the time forestry,logging,fishing, mining,water supply,and trans- being, however,there are no plans to deal specifically portationas wellas to the environmentally related serv- with natural resourceand energyflowsor pollutionproc- ices of housingand sanitation. Similarservicesare also esses in the input-outputsystem. reflectedin the classification of government expenditures by purpose. Since the cost of land improvementis in- ResourceAccounting cludedin grosscapitalformation, this conceptalso covers transactionsdealing with selected natural resources. In none of these conceptsand classifications, however, are A few countries with well-developed monitoringand environmental transactions clearly identified. They are data collectioncapabilitieshave turned to a somewhat typicallylumped together with other nonenvironmental simplified accountingapproach.The basic objec- physical transactions.Moreover,certain environmentalexpendi- tive of resourceaccounting systemsis to pirovide a coher- tures are treated as finalwherethey actuallyrepresent a ent picture of resource use and depletionor increase, cost to society(see "Environmental Costs and Expendi- whichcan be linked to, or integratedwith, the national tures," below). accounts.Norway's resourceaccountsconcentrateon se- lected natural resources and extend the SNA balance BalanceSheets and ReconciliationAccounts sheets to cover the total stock (including nonmarketed stocks) of the respectivenatural resources in physical To date national efforts have largely focused on the units (StatistiskSentralbyra1987). The French "patri- accountingof flowsor transactionsto the neglectof the 82 PeterBartelmus stocks presented in balance sheets. This occursdespite particularlyrelevantfor environmentalanalysis:natural the fact that balancesheets form an integral part of the growthless depletionof timbertracts, forests,and fisher- SNA, linked to its flowaccounts through capitaltransac- ies; new findsless depletionof subsoilassets;and losses tion and reconciliation accounts.There has been growing in land and timber tracts in catastrophesand natural interest, however,in measuringnational wealt& and, in events.Changesin land qualitydue to erosion,waterlog- particular,its tangibleaspects,a significant part of which ging, desertification, or upgradingand increased availa- is madeup of assets of the manmadeand naturalenviron- bilityof mineralresourcesdue to technological advances ment. are not shownseparately. They are recordedas changes Following a recommendation of the "blue book," the in the market valueof land and subsoilassets as part of UNSO issued detailed guidelineson balance sheet and the revaluationitem of the reconciliationaccounts. All reconciliation accountswithinthe framework of the SNA these items are excludedfrom the capital transaction (UnitedNations 1977a). The guidelinesdistinguishbe- accounts and thus do not affect the level of national tween reproducibletangible assets, includingthe fixed incomeor product. assets and stocks of enterprises, financial institutions, government,and private nonprofit institutions,and the Monetary Environmental Accounting nonreproducible tangibleassets of natural resourcesand historicalmonuments.The classification of stocks and As alreadydiscussed,physicalindicatorsand accounts fixed assets presents importantaspects of the manmade cannot be aggregatedinto overallmeasuresof resource environment and listsbuildingsand infrastructural works depletionand environmental degradation.Consequently, as part of fixed assets. The measurementof the availa- they cannotbe compareddirectlywiththe standardmeas- bilityand use of natural resourcesand the assessmentof ures of economic performance to assessthe sustainability relatedenvironmental problemsare considered to be some of economicgrowth or development.For this reason, of the main uses of the classification of nonreproducible physicalmeasureshavenot becomestandards in national tangible assets. Land, timber tracts and forests,subsoil planning and policymaking,but have been largely re- assets and extractionsites, and fisheriesare the principal stricted to use in environmentaland resource manage- categoriesof this classification. ment. Becauseof the prominentrole of nationalaccount- In line with the basic principleof the SNA to limitits ing and its mainaggregatesin formulating and evaluating scope mainlyto market activities(exceptfor imputations national plans and policies, various environmentalac- for directlycompetitive nonmarketactivities), natural re- counting approaches attempted to tackle the issue of sourcesin the publicdomainare excluded.This category sustainabilityand environmental degradationwithin,or as includesrivers,lakes, parklands,unusedwilderness,and close as possibleto, the establishedsystemsof national the atmosphere, whichare not subjectto ownership rights accounting. and are thus generally not sold or purchased.Outlays on Mostof these approaches favorthe direct adjustment of the permanentimprovement and extensionof these items SNA concepts,classifications, and tabulations.It is hoped are coveredin capital formationand thus increase the that this would cause politiciansand administratorsto reproducible tangible assets (as "other construction base their plansand decisionson a conceptof sustainable works"or "landimprovement") of the balancesheets. But income,whichaccountsfor the total cost of destructive no capital consumption is chargedagainstthese outlays. and wastefuluses of the environment and natural re- However, the total initialexpenditurefor naturallygrow- sources.Duringthe current revisionof the SNA, however, ing but commercially traded assets, such as the stock of it was generally agreed that no significantconceptual animals, timber tracts, plantations, and fisheries, is changesshould be introducedin the central framework countedas capitalformation.Further growthand deple- of the SNA. Rather,the emphasisshould be on clarifying, tion are not recorded as capital formation but are in- simplifying, and updatingthe SNA for both producersand cludedin "reconciliation accounts"(seebelow). users of the systemand on improving its consistencywith Balance sheet accounts are linked to the SNA flow other internationalstandardsof statistics.A possiblecom- accounts by capital finance accounts, which portray a promise(suggestedbelowin "Future Work")is to elabo- significant part of the changesbetweenopeningand clos- rate the differentmethodsof environmentalaccounting ingassetsand liabilities. There are, however, severalother in satelliteaccountsand tabulationsof the SNA.3 changes in assets and liabilities,such as revaluations, The following reviewof the mainapproachesdiscussed unforeseenevents, and, in particular, increases or de- in the uNEP/World Bank workshopsillustratesthe possi- creasesin nonreproducible assets,whichare not included ble contentsof satelliteaccounts.Three basic categories in the flowaccountsof the SNA. To coverall differences of environmental accountsare distinguished accordingto betweenthe balancesheet accountsat openingand clos- the mainenvironmental concernsaddressedin the work- ing dates, these changes are formallyintroducedin so- shops, namely accounts of environmental costs and ex- calledreconciliation accounts. penditures, natural resource capital, and environmental The following itemsof the reconciliation accounts are services. Accounting Environmental and the System of National Accounts 83 Environmental Costs and Expenditures investment, they increasedirectlynational product or in- come. Governmental expenditurestypicallyinclude out- The measurementof environmental outlaysand, as far lays for environmental protection and remedy, while as possible,of resourcesor "incomings" of the principal households might bear the cost of medicaltreatment for agents of the national accountingsystemhas been pio- pollution-relateddiseases or the avoidance of environ- neered by France in "environmental satelliteaccounts" mentaldisamenities, for example,by resettlement.If en- (INSEE 1986b).Operating(running) costs or current out- vironmentalexpenditures are incurred by industry,how- laysare distinguished from investment and other capital ever, their current cost component is counted as formationexpenditures. One of the mainproblemsin this intermediate consumption, whichpotentiallydecreases(in approach is to identifythe environmentalactivitiesfor the case of full employment of the factors of production) which outlayshave been incurred. This problem exists industrialvalueadded,that is, industry'scontributionto becausethe standard classifications of the SNA were not national product. Capitalexpenditurefor environmental designedto generate statisticson environmental expen- protectionby industryis treated,however, as finalexpen- diture. diture and is thus fullycountedas an increaseof GNP. For government expenditures,the classification of the All these expenditures serve only to maintaina certain functionsof government (COFOG) does not yet contain a levelof environmental qualityor, in other words,to "de- categoryrelating to the protection of the environment, fend"societyagainstthe unwantedsideeffectsof produc- but it indicatesthat such a groupingmaybe feasiblein tion and consumption. They could, therefore,be consid- the future (United Nations 1980). A list of functional ered as a cost to society,to be deducted from gross classes that include informationon research and other productionand finalconsumption (see "Indicatorsof Sus- aspectsof environmental protectionis advance(d for "fur- tainable Product and Expenditure,"below).Apart from ther examination." A draft classification of outlaysof in- expendituresfor environmental protection and compen- dustriesby purpose(coip)wasdeveloped by the UNSO in sation for environmental damage,defensiveexpenditures 1975 but was not further discussedor promoted.It lists may also include other social costs of urbanizationand nine categories,one of whichspecifiesoutlayson pollu- industrialization,such as commuting costsand provisions tion abatementand control.For this category, outlaysfor for environmental hazards in industriesand the working "end-of-line" measuresare said to be relatively easilyal- environment (Leipert1985).Asalreadymentioned,it may located.However, the incrementalcosts of measuresthat be difficultto identifyseparatelydefensivecosts in the are incorporatedin the productionprocess can be only case of combined measuresthat restore environmental estimated. For private nonprofit bodies serving house- conditionsand raise productivityor utility at the same holds, the SNA containsa classification of purposescon- time. sistingof eightcategoriesthat do not specifyenvironmen- The social restoration cost of meeting or maintaining tal purposes.For households,the SNA's classification of environmental standards for safeguardingsustainable household goods and servicesmighteventually be linked economic development has been advanced as an indicator to a generaland more detailedcentralproduct classifica- that mightusefully supplement nationalproduct (Hueting, tion (cpc), whichhas been prepared by the tJNSO. One Chapter6). The indicatordescribeshowfar a nation has division of this classificationreflectsenvironmental func- driftedfrom its desiredlevelof environmental qualityand tions in categoriessuch as "sewageand reiuse disposal" can thus be compared with the extent the nation has and "sanitationand similarservices." progressedin raisingits level of production. Standards The development of functionalclassificationsin the SNA for sustainabledevelopment couldbe set by decisionmak- that cut across sectoralboundariesand identify expendi- ers or by science, and appropriate measures to meet tures for environmental purposeswouldpermitthese ex- these standardscouldthen be formulated and costed.For pendituresto be aggregatedfor the wholefield of the irreversiblelossesof renewableresources(extinction) or environment and broken downby environrmental protec- for nonrenewable resources,the cost of developing alter- tion category. The aggregateof the total (finaland inter- native resources or facilitiescould be estimated. The mediate)environmental expendituredescribeshowmuch methodof usingstandardshas been proposedbecauseof a nation has been willingto spend on environmental the difficultiesof devising shadowprices for environmen- protectionduring the accountingperiod. T'hisaggregate tal functions(and their losses)that are directlycompara- also facilitatesinternationalcomparisons, since it is not ble with marketprices of producedgoodsand services. affectedby differentinstitutionalarrangements for envi- ronmentalpolicymaking and budgeting. Natural Resource Capital Functional classificationsof environmentalexpendi- tures can also be used to measure so-calleddefensive Most changesin the resourceassets of a country have expenditures incurredby the government, households, or been excludedfrom the standard flow accounts of the industryto counteractenvironmental degradation.When SNA becauseof the lack of reliabledata and uncertainties such expendituresare counted as final consumptionor in estimationand valuationprocedures,particularlyfor 84 Bartelmus Peter assets whosereturns are typically spread over many ac- services (counted as a subsidy or negative input) ancl countingperiods.As describedabove,some of the more deliverenvironmental "bads" (as negativeoutputs)to na- commercial changes are recorded separatelyin reconcili- ture's productionaccount(Peskin1981). ation accounts,but these accounts haverarelybeen pre- The model claimsto be fullyconsistentwith the prin- pared and thus are largely neglected in policymaking. ciples of neoclassicaleconomicsin measuringthe envi- Now,however, awareness of income of the unsustainability ronmentalaspectsof socialwelfare.There are, however, resulting from the consumptionof finite natural assets considerable problemsin measuringand valuingnonmar has created new interest in accountingfor selected re- ket contributions from and to nature and in double sourcesin physicalaccountsand has also revitalized at- counting the external economies and diseconomiesof temptsto assignmonetaryvaluesto the stocks and flows these contributionsthat are already reflectedas produc- of these accounts. tivitychangesin the productionaccounts. In principle,such accounts can be developedin har- monywithnationalaccounting conceptsby extendingthe Indicators of Sustainable Product and Expenditure SNA's balancesheetsto coverfullynaturalresourcessuch as water,forest,or wildlife, evenif they havenol:been the The environmental accounts described aboveproduce objectof commercial transactions.Contraryto the prac- aggregatesthat can be used to modify the valueadded or tice of reconciliation accounts, the separate listing of the valueof gross productioncreated,and the amountof additions(discoveries, net revisions,extensions,growth, expendituresallocatedfor consumptionand investment or reproductions),reductions(extraction,deforestation, by those transactors of the economythat use or protect or degradation),and revaluations ' in "national income ~~~~~~~~~~natural resources and environmentalservices. Accord- accounts for natural resources" has been proposed to ingly,the following new conceptsof gross and net domes- record changes in the values of the stocks of natural tic product, incomeand expenditurehavebeen proposed resourcesduring the accountingperiod (Repetto1986). .. .' Net changesin the valueof the resourcepositioncan be estimatedfrom these accountsfor the calculation of sus- tainableincomeor product indicators.Other procedures SustainableNet Product and Expenditure to estimatethe depletionfactor in the calculation of sus- tainableincomeinclude applyingdepreciation principles Correctingnational incomefor changes in the net re- to the stock of natural resourcesor calculating user cost source position,which is obtained from accountingfor allowances for their intermediateconsumption (see "Indi- depletion and the increase in the stock of natural re- cators of Sustainable Productand Expenditure," below). sources,has been proposed for calculating indicators of sustainableincome or product (see "Natural Resource EnvironmentalServices Capital,"above). It has been argued,however, that geolog- ical discoveriesof natural resources can be neglected, The amount of environmentalexpendituresor costs since they do not reversethe process of depletion but described above does not reflect the correct value of extend only the period over which depletion can con- actualenvironmental damage.On the one hand, the value tinue. Consequently, if the depreciationconceptwere ex- of damagemaybe higheror lowerthan the costof repair- tended to the consumption of natural capitalby resource- ing it. On the other hand, accountingfor environmental exploiting industries,it wouldaccountsufficiently for sus- expenditures neglectsthe fact that pollutionis connected tainability in a measure of sustainable product (Daly, with both the benefits of using nature's disposal and Chapter2). absorptionservicesand the "disbenefits"resultingfrom The valuationof naturalresourcestocks couldbe based lossesof these and other servicesthat benefitconsumers on the principle of replacementcosts or willingnessto directly.Contraryto defensiveexpenditures,these serv- pay. However, changesin the value of environmental as- ices are not priced by the market system and are thus sets can result from both physicaldepreciationand capi- excludedfrom standard national accounts (see Peskin, tal loss or gain, as, for example,with increasingly heavy Chapter10). use of a naturalresource,such as the use of a waterbody The introductionof a natural productionaccountinto for fishingand recreation.In theory,valuationof capital the nationalaccountingsystemwas thereforesuggested. loss or gain should be based thereforeon the marginal Such an account would record environmental services benefitsof uses (Peskin,Chapter10). (for example,waste disposal,cooling, and provisionof The extensionof the depreciation principleto the con- oxygen and nutrients)as output from,and environmental sumptionof natural capitalaffectsthe net valueadded of damage(in particularpollutioneffects)as input into, the industries that exploitnatural resourcesand thus the NDP. environment, withthe balancerepresenting a net environ- In addition,defensive expenditures havebeen considered mentalloss or benefit.Industry, government, and house- as intermediaterather than final consumption,and the hold production accountsreceivenature'soutputas "free" furtherdeductionof such expenditures from net national Accounting Environmental Accounts and the System of National 85 product has been proposed.This procedurewouldyield the exploitation of natural resourcesas intermediatecon- a new indicator,whichhas been termed "sustainable so- sumptionof differentproductionactivitiesand deducting cialnet nationalproduct"(Daly, Chapter2). a corresponding amount from final demandas a change Such sweepingtreatment, however,loses track of the in "environmental 6 For estimating assets." the amountof accounting identity betweennational income(the sum of intermediateconsumption to be deductedfrom the gross valueadded createdin production)and nationalproduct output of resource-exploiting industries,the calculation (the value of final demand)because defensiveexpendi- of a so-calleduser cost allowance has been advocated(El tures contain elements of both intermediateand final Serafy,Chapter3). User costs calculations avoidthe diffi- consumption and capitalformation.A new,imoresystem- culties of estimatingphysical or value depreciationby atic approachto dealingwith(deducting) defensiveexpen- allocating a certainamountof the receiptsfromextractive ditureshas thereforebeenproposedin a draftSNA Frame- industriesto an actual (Ward1982)or hypothetical fund, work for Environmental SatelliteAccounting (Bartelmus which, if invested,would "create a perpetual stream of and van Tongeren1988).The idea is to reduce the pro- incomethat wouldprovidethe same levelof true income, ductionboundaryof the SNA by covering onlynonenviron- both during the life of the resource as well as after the mental activitiesand thus excludingall production of resource has been exhausted" (El Serafy, Chapter 3). environmental goods (filters,chemicals,or wastedisposal Discoveries are simplydealt with by changingthe para- plants)and services(protecting or restoringthe qualityof metersof the life expectancy of the resource,that is, the the environment) that are used in intermediateand final resource-extraction 7 SGDE is derivedfrom SGDP by ratio. demand.In this manner, valueadded and finaldemand deductingadditionally defensive expendituresof environ- are adjustedto obtain identicaltotal values.Further al- mental protection.An approach for deducting defensive lowancefor the depreciationof natural resource assets expenditureswithoutviolatingaccountingidentities was then obtainsa measurethat couldbe termed "sustainable described above(see "Sustainable Net Product and Ex- 5 net national expenditure" (SNNE). penditure"). As an alternative,the joint UNEP/World Bank Expert GroupMeetingin Paris (November 1988) suggestedap- plyinga widerconceptof depreciation to calculate"envi- ModifiedGrossor Net Product ronmentally adjustednet domestic product."This concept would include both the depletion of the environmental The accountingfor environmentalservices and dam- "stock" assets of natural resources and the degradation ages (or their difference,that is, the net environmental in the qualityof "permanent"environmentad assets.The loss or benefit)has been describedas the result of intro- depreciation of environmental qualitycould be estimated ducinga natural production accountthat modifiesgross as the differencebetween actual defensiveexpenditure output in the productionaccounts.This procedurewould and the cost of restoring environmentalqluality to the yielda "modified gross nationalproduct" (Peskin,Chap- levelat the beginningof the accountingperiod (in other ter 10). Deductingenvironmentaland other economic words,"potential"defensive expenditures). However, such depreciationfrom this aggregateproduces a "modified a procedureneither accounts for the "inflation"of NDP net domesticproduct,"whichwouldaccountfor environ- by defensive expenditures nor reflectsactualienvironmen- mentaldegradationas wellas resourcedepletion.Consid- tal degradation or damage. Clearly, monr research is erableproblemsof measuringand valuingenvironmental needed to clarify the relations between damage costs servicesand damageswillprobablymake the estimation (expenditures) and actual damage as well as their impli- of these indicatorsthe object of research studies rather cationsfor environmental accounting. than of routine compilation in environmental accounts. SustainableGrossProduct and Expenditure Future Work Unfortunately, net product is infrequenty calculated and rarelyused in quantitativeeconomic analysis because As indicatedat the beginningof this chapter,worldwide of the well-known of estimatingdepreciation. difficulties concernwith the sustainabilityof current patterns of pro- Therefore,GDP has usuallyreceivedmore attention in duction and consumptionhas raised doubts about the economic planningand policy, under the assumption that suitabilityof standardaccountingand its main aggregates the grossand net indicatorsmovesimilarly civertime. The for integratedsocioeconomic and environmentally sound adjustmentof gross rather than net product or income planningand policies.In this context,the WorldCommis- has therefore been suggested to obtain a measure of sion on Environment and Development drewattention to "sustainable gross domesticproduct" (SGDP') or "sustain- the need to shift emphasisfromthe standardenvironmen- able gross domesticexpenditure" (SGDE). tal policyof dealingwith environmental effectsafter they The draft SNA Frameworkfor Environmental Satellite occurredto "an approach concentratingon the policies Accounting proposesto calculateSGDP by accountingfor that are the sourcesof those effects"(WorldCommission 86 PeterBartelmus 1987, p. 310). Such policies should be assessed by indi- Notes cators that present socioeconomic progress net of all environmental costs. Up to now these costs have generally 1. For a further discussion of the concept of sustainable been neglected or wrongly accounted for in the standard development, see Bartelmus(1987a). macroeconomic aggregates. 2. See, however, Bartelmus(1987b),who proposed to apply The obvious place to develop and standardize concepts the generic principlesof the FDES to the SNA and the SSDSto and procedures of environmental accounting is the exist- developan "overall framework for statisticalintegration." ing standard System of National Accounts, the SNA. The 3. The term "satellite accounts"is used here in a broadsense of ongoin the SNA provides a unique opportunity revision to include,besidesoutlaysand financialresourcesfor environ- to examine how the concepts definitions classifications mental protection (as presented in environmental satellite ac- how the concepts, definitions, classifications, t examine counts in the narrowsense; see, for example,INSEE 1986b), and tabulations recently developed in the fields of envi- costsand benefitsof environmental impactsand resourcedeple- ronmental and resource accounting can be related to, or tion or discovery. integrated in, the SNA. At the current stage of develop- 4. Of course,these modifications applyalsoto nationalprod- ment it might be premature, however,to radically change uct and income(addingnet factor incomefrom abroad);these a well-establishedsystem of data collection and account- indicatorsare less frequently used, however, and, unlessother- ing that serves many different short-, medium-, and long- wiseindicated,referenceis made to domestic product only. 8 5. Even though accountingidentitiesare maintainedby this term socioeconomic analyses. Therefore, standards for environmentaland resource accounting should be further procedureof deductingdefensive expenditures, severalassump- elaborated in a satellite system of environmental accounts tions make the meaningof SNNEsomewhatambiguous,espe- of the SNA. Efficient linkage will require some amend- ciallyfor ex-anteanalysis.The first assumptionis that environ- to ofnts the S ll eicien clnkagewio rsmexand- mental production is not replaced by nonenvironmental ments to the existing classifications as well as explana- production.Thisis realisticonlyif SNNEis to reflect the aggre- tions of, or cross-references to, alternative concepts and gate value of nonenvironmental income ex post. If it is to tabulations in the core recommendations of the SNA. approximate potentialincome,however, and referto a situation A first draft of the SNA Framework for Environmental free of environmental distortions,one could assumethat factor Satellite Accounting was discussed by the joint UNEP/ inputsreleasedfromenvironmental productionwouldhavebeen World Bank Expert Group Meeting on Environmental used to generate additional income. In addition, the above Accounting and the SNA, and several recommendations definitionof defensive expenditures does not account for indi- were made. that is, the employment rect effects, of nonenvironmental goods and services in the supply of goods and services related to * The revised SNA should provide a place for environ- defensive expenditures. 6. Changesin environmental assets introducea new element mencstal faccnts wthinathe overtallsymemand shoduld into final demand,which replacesthe conceptof capital accu- discuss the fact that conventional income anc, product mulation witha newconceptof "changesin tangiblewealth." measures do not reflect environmental degradation and 7. Anotherpossibilityis to consider discoveriesof new re- depletion of natural resources. sourcesas the creationof an asset and to record this activityas * Environmental accounting should be presented as own-account capital formation of the mining industry (OECD satellite accounts and not in the SNA itself. 1985). * Functional classifications should be developed that 8. At least,this appearsto be the viewof the expertsworking identify separately environmental goods and services, in on the current revisionof the SNA,who concludedthat "no particular in COFOG, cpc, coip, and isic. major conceptual changes in the SNA should be introduced" * Environmental resources that cannot be valued as Nations1986,p. 6). (United stocks should be listed in the form of an inventory that may include indicators of physical quantity and quality. 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NewYork.Processed. counting.WorldBank,Washington, D.C.Processed. . 1988. Energy Balancesand ElectricityProfiles 1986. Samuelson, Paul A. 1980. Economics. 11th ed. New York: E.86.XVII.14. NewYork. McGraw-Hill. U.N.StatisticalCommission.1987.Reporton the Twenty-Fourth StatistiskSentralbyra.1987.NaturalResource Accountingand Session.E/1987119. NewYork. Analysis:TheNorwegian Experience,1978-198f. Oslo. Ward,Michael. 1982. "Accountingfor the Depletionof Natural United Nations. 1968. A System of National Accounts. Resourcesin the NationalAccountsof DevelopingEcono- E.69.XVII.3. NewYork. mies." CD/R(82)3010. OECD,Paris. Processed. . 1973.Report of the UnitedNationsConfermnce on the World Commission on Environmentand Development. 1987. Human Environment, Stockholm, June 5-16, 1972. Our CommonFuture.Oxfordand NewYork:OxfordUniver- E.73.11.A.14. NewYork. sity Press. -. 1975. Towarda System of Social and Demographic Statistics.E.74.XVII.8. NewYork. 12 RecentDelopments and FuhureWork Ernst Lutz and Salah El Serafy The Systemof NationalAccounts(SNA) that is currently defensive expenditures and the depletionand degradation in use is based on a document published more than of natural resources. twentyyearsago (United Nations1968).A revision of this For defensiveexpenditures,the Bank recommended systemwas started in the early 1980s,with a number of that the experts: expert groups lookingat variousissues and considering * Discuss decidewhichexpen- and, as soon as feasible, howimprovementscould be made with as little distur-' bance tmprovthem systemadewit cored as posbleithe rvisi expenditures" dituresare to be includedunder "defensive bance to the sNA core system as possible.The revisions * Agreethat these are to be shownas a separate line are scheduledto be completedby 1991,at whichtime a item newversion wouldbe issued. * Decidewhere the adjustmentsare to be made and Giventhe shortcomings of the current systemwith re- wherethe adjustedaggregatesare to be shown(in satellite spect to the environment and natural resources,the ques- tion is how to reach the long-termgoal of makingthe accountsor i the main systemof producton, consump- necessarychanges so that national income accounting tion, and accumulation accounts). more accurately represents true, sustainable income. On the issueof resourcedepletionand degradation,the Some,at leastin the past, havearguedforradicalchanges, Bank recommended that the expert group: whileothers have supported more gradual changesthat * Adopt the principleof sNA-linked satelliteaccounts, wouldimproveincome estimatesby movingthem in the whereadjustmentsfor resource depletion and degrada- right direction. Although it is clearly desirable to make tion can be made improvements as soon as possible,some outstanding con- portion of gross o Advisecountrieswherea significant ceptualissuesare yet to be resolved,and much empirical workmuststil secifc rcommndatons bedonebefre nationalproduct (GNP) is based on the depletionor degra- work muststill be done beforespecific recommendations dation of naturalresourcesthat current income,as calcu- for changesin the core of the SNA can be made. In the lated at present,overestimatessustainable incomeand that meantime,the creation of satelliteaccounts appears to policymakers shouldexplicitlybe alertedto this fact be the only realisticoptionfor progressin this area. * Encourageworkon estimating the costs and benefits of resourcedepletionand degradation. March1988) sNA Expert GroupMeeting(Vienna, The members of the group agreedthat these two issues In the contextof deliberationsoverwhetherand in what are of great importance and indicatedthat they shared waythe SNA shouldbe revised, the WorldBank presented the Bank'sconcernabout the environment and supported a discussionnote to the SNA expert group meetingheld the constructionof satelliteaccountslinked withthe SNA, in March1988 in Viennaunder the agendaitem "Links as wellas the development withinthe central SNA frame- between SNA and EnvironmentStatistics."The note fo- work of the functional of government classification expen- cusedon the two main concernselaboratedin Chapter1: ditures(COFOG) and enterpriseexpenditures(coip)in or- der to identifyexpendituresrelevant to environmental analysis.However, they did not agree to changingthe _ _ _ core accounts of the _ __ SNA in any fundamental way. Three Note:The annex byJan W.vanTongeren. waswritten reasonsweregivenfor this. 88 and Future Work RecentDevelopments 89 * Since there are variousconceptualapproachesthat * As presentlycalculated,GDP is not a comprehensive could be taken for revisingthe SNA, a consensusshould indicatorthat can satisfyadequatelya diversity of needs, be reachedbeforethe core SNA is revised. and its shortcomings should be kept firmlyin mind. * In the environmental fieldmany valuationissuesare * ReplacingGDP with a more sustainablemeasure of difficult,and more work is required beforestandard val- incomeis not yet feasible.For the time being, therefore, uationtechniquescan be applied. satelliteaccountslinked to the SNA should be created in * The group waspleasedthat a list of paperspresented whichadjustmentsand alternativecomputationscan be at the joint uNEPIWorldBank workshops was attachedto made. the Bank's position paper. But since they had not seen * The revisedversionof the "blue book" (the volume thembeforebecauseof the limitedcommunication so far describingthe core accountsof the SNA), to be issued in betweenenvironmentalists they and nationalaccountants, 1991, should have a section in whichsatellite accounts did not knowwhat the issuesand options were (and this for the environment are outlined. supported the urgent need for producingthis volume). * For the environment,net measures, suchas net domes- tic product (NDP), maybe more meaningful and shouldbe As a concessionto the environmental the community, emhszdortangsseaumns,ucasGP chairman ~ if an.hnaeuaeeprec stte tha emphasizedmore than gross measurements,such as GDP. chaian stated withsatei andawhen t rienc * Further developments of the draft frameworkmight hasceenlgainedwithlsateite accounts hand wen variousd t deal withvariousassets such as air, water,and land sep- nationalaccountantsshould be open to an re revision, arately,since a uniformtreatment maynot be possible. thaccountan shoulner on to antSNa enation .reion, * A classification of intermediateconsumption by func- eveneinthatwast mu the twenty-yearipei.o tion (coIP) and government expenditure by function should be developed where "environmental goods betweng Duringthe thelasond some other points w the urre reinso discussion weremadeby (COFOG) ansevc"aridtfe. pripat. vaiu variousparticipants. e services" and Accountingare identified. for stocks of naturalresourcesshould be * Usersshouldbe cautionedabout the gross,domestic done in physical terms, not in monetaryterms; monetary product (GDP) as calculatedat present; the revisedSNA estimations, however, shouldbe attemptedfor changesin manual ("bluebook")should includea discussionof the the stock of resourceswithinthe period under consider- shortcomingsof the GDP and state necessarywarnings ation. againstits indiscriminate use. * For exploitable, commercially salableresourcessuch - Communication between national accountants and as minerals,a user cost approach,such as the one pro- environmental economistsshouldbe encouragedso that posed by El Serafy, shouldbe followed (Chapter3). problemscan be discussedjointly. * For "permanent"resources,such as air, water, and * Approximations that maybe needed in erivironmen- soil, two options should continueto be pursuedsimulta- tal accounting maynot be worse than some currentarbi- neously: treating restorationcosts as intermediateexpen- traryestimationsalreadysanctionedby the SNA,. dituresrather than as final ones, as is generallydone in * The SNA shouldbe linkednot only withenvironmen- the SNA, and treating damagesto "permanent"resources tal statisticsbut with socialstatisticsas well. as consumption of natural capital. At the end of the meetingthe group agreed that these * Two (or possibly shouldbe computed: three) NDPs issueswouldhaveto be discussedagainand that prefer- GDP - consumptionldepreciationof man-madecapital 1 ablynationalaccountants and resourceeconom,istsshould = NDP address them together. A meeting combiningthe two NDPI - of natural capital consumption/depreciation 2 groups was held in November 1988, as described below. = NDP . * Further research is necessaryto decidewhat deduc- Joint Unmentald Ac nk th S nting tions for defensiveexpenditurewouldbe appropriateto Environmental Accountingand the SNAprdcND (Paris, November 1988) produce NDP3. These points of agreementwere communicatedto the SNA expert meeting later held in Luxemburg,which is National accounts experts and environmentalecono- deciedblw mists met in Paris to discuss a draft frameworkfor a describedbelow. proposedset of environmental satelliteaccounts(Bartel- mus and van Tongeren 1988). Both groups were willing and a consen- to learn, the meetingwasvery productive, This was the last expert meetingof many held during sus wasreachedon severalpoints, the past few years on the revisionof the SNAbefore an * Natural resources and the environmentare impor- actual completedraft of the new "blue book" is consid- tant and are likelyto becomemore so in the future, so ered. Manyoutstanding issueshad to be decided.On the theyshould be properlyaccountedfor. issueof the environment, the meetingendorsedthe crea- 90 Ernst Lutz and Salah El Serafy tion of environmental satelliteaccounts linked with the counting"needs to be developedinto a draft manualand SNA. It wasdecidedthat the new"blue book"willdescribe eventually into a handbookin the handbookseries of the these, and further research in this important area was SNA. encouraged.In another context,as far as the concept of 0 Evaluation of existingschemes.Currently,severalin- incomeis concerned,the meetingadoptedthe Hicksian dustrialcountries (Canada,France, Federal Republicof definition(See Daly,Chapter2 and El Serafy, Chapter3), Germany,Japan, Netherlands,Norway,and the United witha minoraddition,as a basisfor definingthe coverage States) have developedor are developingresource ac- and treatmentof capitalflows.Accordingly, incomeis the counting systems.Each of those approaches should be maximum an individual(or nation)can consumeduringa evaluated and anygeneral lessonsidentified. period while keeping intact the stock of capital at the * Pilot case studies in developingcountries.These pi- beginningof the period as well as any net additionsto lot projectswould: try out the Bartelmus-van Tongeren capital during the period. The explicitadoption of this framework in severalcountrieswith differentnatural and concept does not imply,however,that the central SNA environmental resourceproblemsand perhaps in one or framework has fullyadopted the concept of sustainable two industrial countries with the most availabledata, income. providelessonsfor integrationinto the draftmanual,and As a matter of fact: determinethe policyimplications of the improved income * GDP will continueto be defined under the revised accounting. sNA without ajtefWorking group SNA without adjustmentfor the degradationof natural tedatmna hexpert nand The authors esnmeetings. novdi h io of capitalfromthe processof productionand consumption. * The use of nonrenewable subsoilassets will not be studies should meet to sevuentle sutuinevsioouldm reviewthe draft manual. The presenTedtoare- nto acountin taken defning alue dded.sulting revision would subsequently be presented to an taken intoccoutinefinngvaueadedexpert meetingand afterwardbe developed into a hand- An alternative sustainable income concept to GDP book. thereforewillhaveto be elaboratedin a separate hand- * In-depthcase studieson developing countries. Con- book on environmental accounting. trary to the pilot studies,the in-depthcase studieswould A descriptionof the current treatmentof nonreproduc- involvenew data generation and longer-terminstitution ible assets, stocks, and flowsin the SNA and a proposal building. for its modificationwas circulatedas a background(locu- * Physical resourceaccounting.UNEP has already done ment;it is reproducedas the annex to this chapter.The considerable work in this area,but furthereffortis needed proposalis very importantfrom an environmental point to assessthe environment and natural resource base, its of view, but there wasno time to discussit at the meeting. changesin quantityand quality,and its linkageto mone- Future Work tary accounting. It is foreseenthat these tasks, as wellas other possible Inducingproduction and consumptionpractices with ones, would be undertaken cooperatively by the World less negativeeffectson the environmentworldwide is a Bank, the U.N.StatisticalOffice(UNSO), the U.N.Devel- formidabletask. Changesare needed in policies, pro- opment Programme (UNDP), and UNEP, along with inter- grams, projects, institutions,the distributionof income ested foundations (including the Ford Foundationand the and wealth,and human behavior. But necessarychanges NoyesFoundation), bilateraldonors,nongovernmental or- are often slowin coming.Improvements in any one area ganizations, and developing-country governments. can make only a partial contributionto an approach wheremanyparallel activities are needed to achieve' de- Annex. The Treatment of Nonreproducible Assets, velopmentthat is both equitable and environmentally Stocks, and Flows under Present SNA and "M.60 sound. Environmental accountingis only one of many Standards" for Reconciliation Accounts tools that are needed,and, giventhe lack of past effort, it willtake time to developit into an effectivetocl to M.60is an importantdocumentfromthe point of view improve policymaking. Nevertheless, seriouswork in this of environmental becauseit includesa framework analysis area should nowbe pursuedactively and vigorously. and supplementaryguidelines for developingresource After several years with little visible progress, some balances(stocksand flows)that are compatiblewith the steps forwardhave been made recently in the field of steps fah bn blne dSNA.Sincesok M.60was lw)ta much n developed r optbewt h later than the SNA, environmental and resourceaccounting.But much niore however, it reflectssome advancesin the field that were remainsto be done both at the conceptual as wellas the not available whenthe 1968 SNA was drafted.Therefore practicallevels. between the SNA and there are severalincompatibilities * Draft manual/handbook. The Bartelmus-vanTon- M.60 that should be addressed during the present SNA geren "DraftFrameworkfor Environmental SatelliteAc- revision. Recent andFutureWork 91 Developments The general rule in the SNA and M.60 is that changes * Nonreproducible assets should be included in the in nonreproducible assetsare recordedin the capital(flow) balancesheets whenthey are marketedand their use in accountswhena transaction(a purchaseor sale)occurs human production activitiesgenerates product and in- and in the present M.60 reconciliationaccotnts when come. This implies that land should be includedwhenit other changesoccur in the asset balances.In additionto is used for agriculture,human settlement,and so forth price changes,the latter includechangesfrom newfinds, and that income should be reflected in GDP, GNP, or growth,destruction,and depletionof assets (see Chapter national income, either as a result of marketed or im- 11). The valueof nonreproducible assets in the balance putedproduction,including own-account agriculturalout- sheet and reconciliationaccountswhenthere is,no sale is put and imputed dwellings services to owners. For the based on actualvaluesof similarassetsthat are sold(such samereason, historicalmonuments shouldbe includedin as for land) or on the sum of discountedfuture values the balance sheets as soon as the assets generate identi- (suchas for timbertracts and mineraldeposits'. fiable income.In other words, assets should not be in- The generalrules are not applieduniformly to all assets cludedwhentheyare marketedbut whenthey are actually and are unclear for some. The actual treatment distin- used for production and other activitiesthat produce guishesamongland; historicalmonuments; tirnbertracts flowsregisteredelsewherein the SNA. It is importantto and forests; plantationsand orchards;cultivatedagricul- establishthis link between income and production, on tural products; livestockfor dairy, breeding,and draft; the one hand, and the assets used in production,on the and livestock for meat production. other, to arriveat correct capital-output ratios and other measuresof productivity. SpecificApplicationsof the GeneralRule * The natural growth of agriculturalproducts, prod- ucts of plantationsand orchards, timber, and livestock * Naturalresourcesin the public domain are entirely for dairy, breeding,and meat production should be re- excluded. cordedas gross output at the momentof growthand not * Land and historicalmonumentsare include(iin the at the moment of harvest (for products of agriculture, balancesheets only after an actual sale.This impliesthat plantations,and orchards),logging(for timber), or birth only entries for changesin these assets are reccrdedin (for livestock).During growth,the production shouldbe the M.60reconciliation accountsif sales take place. reflected in changes in stocks, and, once allocatedto * For mineralresources, newfinds as wellas depletion uses,the stocks shouldbe reducedagain. This treatment are recordedin the presentM.60 reconciliation accounts. wouldeliminatefromthe present M.60 reconciliation ac- It is not clear, however,what the exact coverageof the countsthe entriesfor naturalgrowthminusdepletionand newfindsis; does it includeall newfinds,does it include wouldchannelthese entriesthroughall changesin stocks, only those mineraldepositsthat are actuallymined,or is exceptfor livestockgrowthused for dairy,breeding,and there some intermediate typeof coverage for newfinds? similarpurposes,whichwouldbe allocatedto gross fixed - Natural growthminus depletion of timber, planta- capital formation.This proposed treatment is an exten- tions, orchards,and so forth is recordedin the reconcili- sion of the treatment for agricultural products suggested ation accounts.There is no link between thi.streatment by the November1988 meeting in BuenosAires organ- in the balance sheets and production,whichis recorded izedjointlyby the Economic Commission for Latin Amer- only whentimber is loggedand whenorchard and plan- ica (ECLAC/CEPAL) and the MonetaryCenter for Latin tation productionis harvested. America(MCLA/CEMLA).That suggestionwasmadeto bet- * The growthof livestock is included,on the one hand, ter link gross output and cost in agricultural production, as an item in the M.60reconciliation accountsi(together particularlyunderhigh inflation.Similar argumentswould with the other natural growthitemsmentionabove)and, hold for all the other products of natural growth men- on the other hand, as either grossfixedcapitalformation tioned above. (for animalsfor dairy,breeding, draft, and so forth) or changesin stocks(foranimals formeat production). These References two treatmentsseem contradictory. * Agricultural production is not reflected in the bal- Peter, and Jan W. van Tongeren.1988. "Draft Bartelmus, ance sheets or reconciliation accounts and is not regis- Frameworkfor Environmental SatelliteAccounting."U.N. tered as changesin stocks during the growthprocess.It Office, Statistical New Processed. York. is recorded as man-made production after it is harvested. UnitedNations.1968. "A Systemof NationalAccounts." Publi- NewYork. cationE.69.XVI1.3. ProposedModifications The following modifications would make the above treatmentsmore consistent. Appendix at thetNEP- Participants WorldBan Workshops The affiliationsgiven were those at the time the work- Second Workshop, Washington, D.C., shops wereheld. November 5-7, 1984 Chairman:YusufJ. Ahmad,UNEP, Nairobi,Kenya First Workshop,Geneva,February23-25, 1983 Rapporteurs:John Dixon, East-WestCenter, University of Hawaii, Honolulu, U.S.A.;and RichardB. Norgaard, Chairman:YusufJ. Ahmad,UNEP,Nairobi,Kenya JUniversity of California, U.S.A. Berkeley, Contributors Contributors Anthony Friend, Statistics Canada, Ottawa, Canada. Robert Goodland and GeorgeLedec,WorldBank, Wash- "Natural Resource Accounting: International Experi- ington,D.C.,U.S.A. "Neoclassical Economics and Prin- ence." ciplesof SustainableDevelopment." Per Garnasjordet,CentralBureauof Statistics,Dslo,Nor- Roefie Hueting,Central Bureau of Statistics, Voorburg, way."ResourceAccounts: The Norwegian Experience." Netherlands. "EconomicAspectsof Environmental Ac- Roefie Hueting,Central Bureau of Statistics,Voorburg, counting." Netherlands."Use of Environmental Datain Economic RichardB. Norgaardand John Dixon,University of Cali- Decisions:Netherlands." fomia, Berkeley,and Universityof Hawaii, Honolulu HenryM. Peskin, Resources for the Future, Washington, U.S.A. "Project Design and Evaluation (respectively), D.C., U.S.A."NationalIncomeAccountsand the Envi- UsingEconomicand Coevolutionary Criteria." ronment." Jacques Theys, Ministry of the Environment, Paris, MichelPoitier, EnvironmentDirectorate, OECD, Paris, France."Environmental Accounting and Its Use in De- France. "National ResourceAccounts:OECD." velopment Policy." WalterSpofford,Resourcesfor the Future, Washington, D.C.,U.S.A."Environment and Development." OtherParticipants Jacques Theys,Ministryof Environment,Paris, France. "NaturalResourceAccounts:France." Ali Al-Damkhi,EnvironmentProtection Council,Safat, AtsushiYoshikawa, Environment Agency,Tokyo,Japan. Kuwait "Macroeconomic Accounting for the Environment and Ali Al-Juwaiser, Saudi Fund for Development,Riyadh, the Qualityof Life." SaudiArabia Lester Brown,Worldwatch Institute, Washington,D.C., Other Participants U.S.A. Institutefor Environment DavidBurns,International and Partha Dasgupta,LondonSchool of Economics,United Development, London,UnitedKingdom Kingdom HermanE. Daly,LouisianaState University, Baton Rouge, RobertGoodland,WorldBank,Washington D.C.,U.S.A. U.S.A. 93 94 of the UNEP- Participants WorldBank Workshops Remedios De Leon,NationalEconomic and Development "Environmental Accountsand Development Planning: Manila,Philippines Authority, Proposalsfor a Programme of Action." RobertGoodland, WorldBank,Washington, D.C.,U.S.A. Norman Holly,Resources for the Future, Washington, Other Participants D.C.,U.S.A. D.C., U.S.A. Francis Anokwu, Federal Ministryof Finance, Lagos, G. L. Kamukala,Ministryof Lands, Dar es Salaam, Nigeria Tanzania Serge Antoine,Ministry of the Environment, Neuillysur- Charles M. Kasaba, NationalEnvironmentand Human Sene Frnc SettlementSecretariat,Nairobi,Kenya Seme, France ArabindaKundu,WorldBank,Washington, D.C.,U.S.A. IwanJayaAzis,University of Indonesia,Jakarta James ahnDavid Lee, Wolak Burns,Institutefor Environment and Development, JamesLee, WorldBank, Washington, D.C.,U.S.A. London,England RagnarOverby, WorldBank,Washington, D.C.,U.S.A. AlisonA. Gilbert, Free University, Amsterdam,Nether- A. Padmanabhan, Commissioner for Revenue Administra- lands tion, Madras,India RoefieHueting,Central Bureau of Statistics, Voorburg, David Pearce,University College, London,UnitedKingdom Netherlands WilbernePersaud, University of the West Indies, K;ings- G. L. Kamukala,Ministryof Lands, Dar es Salaam, ton, Jamaica Tanzania HenryM. Peskin, Resources for the Future, Washington, Charles Karaba, NationalEnvironmentand Human Set- D.C.,U.S.A. tlementsSecretariat,Nairobi,Kenya ThomasRobertson,consultant,Washington, D.C.,U.S.A. Arabinda A. Kundu, World Bank, Washington, D.C., WalterSpofford,Resourcesfor the Future, Washington, U.S.A. D.C.,U.S.A. ArmandoLosada,Colombia. Pedro Vivas,NationalPlanningInstitute,Lima,Penr KositPanpiemras,Officeof the NationalEconomicand JeremyWarford,WorldBank,Washington, D.C.,U.S.A. SocialDevelopment Board, Bangkok,Thailand Ted Wolf, Worldwatch Institute,Washington, D.C.,U.S.A. WilbernePersaud, Departmentof Economics, University of the West Indies,Jamaica Third Workshop,Paris, September30- A. Pisserides,Environmental Management Unit, Ministry October 2, 1985 of Agriculture,Nicosia, Cyprus MichelPoitier,OECD, Paris, France Co-chairmen: YusufJ. Ahmad,UNEP, Nairobi,Kenya,and Robert Repetto,WorldResourcesInstitute,Washington, Robert Goodland, World Bank, Washington, D).C., D.C.,U.S.A. U.S.A. Juan Pablo Ruiz, Environment Office,Bogota, Colombia Rapporteur:Salah El Serafy,WorldBank, Washington, Harlendos Santos,Ministry of UrbanDevelopment, Bras- D.C.,U.S.A. ilia,Brazil SophieSchlingemann, UNEP, Nairobi,Kenya Contributors Fourth Workshop,Washington,D.C., Herman E. Daly,Louisiana BatonRouge, State University, November 17-18, 1986 U.S.A."A ModestProposalfor a ModestStart in Mod- estlyRelatingEnvironmental and Economic Accounts." Chairman:Salah El Serafy, World Bank, Washington, John Dixon(withRichardCarpenter,LouiseFallon,Paul D.C.,U.S.A. Sherman,and SupachitManopimoke), East-WestCen- Rapporteur:DerekW.Blades,OECD, Paris, France of Hawaii,U.S.A.."Economic ter, University Measure- Contributors ment of Environmental Effects." HuibJansen and J. B. Vos,Free University, Amstercdam, Peter Bartelmus,UNSO, NewYork,U.S.A.."Environmen- Netherlands."Indicatorsfor Environmental Problems tal Accounting and the SNA." in Developing Countries." Derek W. Blades,OECD, Paris, France. "Environmental RichardB. Norgaard,University Berkeley, of California, Statisticsand the NationalAccounts." U.S.A. "LinkingEnvironmental and NationalIncome HermanE. Daly,Louisiana State University, BatonRouge, Accounts." La., U.S.A. "Towarda Measureof SustainableSocial JacquesTheys,Ministry of the Environment, ParisFrance. Net NationalProduct." Participants of the UNEP- WorldBank Workshops 95 Salah El Serafy,WorldBank, Washington, D.C., U.S.A. J. L. Weber,Ministryof Research,Neuilly,France. "Les "The Proper Calculationof Income from Depletable Comptes du PatrimoineNaturel(PresentationSuccinte NaturalResources." d'ExperienceFrancaise." Anthony Friend, Statistics Canada, Ottawa, Canada. "Natural ResourceAccounting:A Canadian Perspec- OtherParticipants tive." Roefie Hueting,Central Bureau of Statistics,Voorburg,C. Averos,OECD, Paris, France Netherlands."Possibilitiesfor IncorporatingChanges Mr. Frias, Ministryof Economyand Finance, Madrid, in the Environment,IncludingNatural Resources,in Spain the NationalIncome." G.Guignabel, Ministry of Environment, Paris, France ChristianLeipert,InternationalInstitutefor Environment Other Participants and Society, Berlin,FederalRepublicof Germany 0. Lone,Ministry of Environment, Oslo,Norway YusufJ. Ahmad,UNEP, Nairobi,Kenya Lorents Lorentsen,Ministryof Environment,Oslo, Nor- RobertGoodland, WorldBank,Washington, D.C.,U.S.A. way Anne Harrison,WorldBank,Washington, D.C.,U.S.A. J. Margat, Research Institute for Geologyand Mines, RagnarOverby, WorldBank,Washington, D.C.,U.S.A. France HenryM. Peskin,Resourcesfor the Future, Wlashington, N. Mensah,UNEP, Nairobi,Kenya D.C.,U.S.A. G. Panella,Ministryof Environment, Rome,Italy Robert Repetto,WorldResourcesInstitute,WAashington, Sophie Schlingemann, UNEP, Nairobi,Kenya U.S.A. D.C., Sophie.SCh.ingemann, U.ES,.Nairobi,AKenya Expert Meeting, Paris, November 21-22, 1988 Sophie Schlingemannl, UNEP, Nairobi, Keny'a Chairman:Salah El Serafy, World Bank, Washington, Fifth Workshop, Paris, November 20-21, 1986 D.C.,U.S.A. Rapporteur:DerekW.Blades,OECD, Paris, France Chairmen: JacquesTheys,Ministry of Environrnent, Paris; and YusufJ. Ahmad,UNEP, Nairobi,Kenya Participants Central Bureauof Statis- Rapporteur:Per Garnasjordet, tics, Oslo,Norway YusufJ. Ahmad,UNEP, Nairobi,Kenya Peter Bartelmus,uNso,NewYork,U.S.A. Contributors RameshChander,WorldBank,Washington, D.C.,U.S.A. AnthonyFriend,StatisticsCanada,Ottawa,Canada A. Gilbertand W.Hufkamp,Free University, Amsterdam, AnneHrisn, Stat, Ckbrdgt, U.K. Netherlands."NaturalResourceAccounting in a Multi- AnneHarrison,consultant Stockbridge,U.K. Objective Context." Peter Hill,OECD, Paris, France DavidJames,Institutefor Environmental Studies,Amster- Roefie Huetmng, Central Bureau of Statishics,Voorburg, dm h ehrad Netherlands,in cooperationwith N. Yunus,University dam,The Netherlands of Indonesia,Jakarta. "A Note on the Construction of Lorents Lorentsen,Central Bureau of Statistics, Oslo, an Environmental Indicator in MonetaryTerms as a Norway Supplement to NationalIncomewith the Aid of Basic Ernst Lutz, WorldBank,Washington, D.C.,U.S.A. Environmental Statistics." Pablo Mandler,Central Bureau of Statistics,Jerusalem, H. Jansenand B. Vos,Free University, Amsterdam, Neth- Israel erlands."IndicatorsforAssessments of SustainableDe- AnilMarkandya, University College,London,U.K. velopment." Brian Newson,StatisticalOfficeof the European Com- T. Loikkanen, Ministry of the Environmenil,Helsinki,Fin- munities,Luxemburg land."Environmental Accounting Developmrents in Fin- GrahamPyatt, University of Warwick, Warwick,U.K. land." SelangeSenaize,UNEP, Nairobi,Kenya I. M. Naredo,Madrid,Spain. "Caracteristiques des Ap- Carsten Stahmer, Federal StatisticalOffice,Wiesbaden, proches EconomiquesNecessairepour Tenir Compte FederalRepublicof Germany des Resources Naturelles(Comparison avecle Systeme Jacques Theys,Ministry of the Environment,Paris, France Standard)." J. L. Weber,Ministry of Research,Neuilly, France Index Alfsen,Knut,5 and natural capital, 6, 20-22; sustainablelevel of, 11. See also Arens,Peter L., 6 Depletion; Depreciation Assets.See Capital Corden,W.M., 17 nl Ayres,R. U., 26, 65 best estimatesof,29; of defensive Cost(s): expenditures,33-38; experi- ments to measureenvironmental, 37; of extraction,17; need for Balancesheet accounts,40, 42, 44; guidelines in S9A for, 81-82; for estimatesof environmental and nonmarket,60; of pollutionabate- naturalresources,24 ment,27-29, 31; shadow, 60, 64 n3 Bartelmus, Peter, 6, 85, 86 nnl, 2, 89 CMted'lvoire:establishment of soilaccountin, 50 Baumol, WilliamJ., 62 Cremeans, J. E., 28-29 Bax,J., 37 Benerit-costanalysis, monetsryvalue,62-63 56; as methodto achieve Daly,HermanE., 2, 3, 6, 20, 84, 85, 90 Blades,Derek,2, 59 Data,environmental: international organizationsas coordinators of,54- Bounded-knowledge synthesis,56-57 55; as link to economic information, 65; as sourcesfor developing Bower, BlairT.,77 nl countriesof,47-49; as sourcesfor pollutionabatement,monitoring, Bye,Torstein,5 and controlcosts,28-29. See alsoStatistics,environmental DataResources, Inc.,72 Canada:input-output modeluse in, 26; resourceaccc,unting in, 5 Defensive expenditures.- categoriesof, 9; for environmental protection, Capital:aggregation of physicaldata for environmental, 63; benefitsand 20-22, 33-38; existingand proposedaccounting treatmentfor,1-3. disbenefitsassociatedwith environmental, 66, 67; consumptionof See also Costs;Pollutionabatement; Sustainability fLxed,20; consumption of natural,6; countryapproaches to assessing de Groot,R. S., 37 naturalresource,4547; depletionfactoras invesiment and, 13-14, de Jouvenel, Bertrand,42 17; deteriorationof environmental, 60; distinction betweenincome Denison, EdwardF., 72 and, 11, 17; environmental enhancement as format:ion of,22-23, 33; Depletion: accounting in industrializedcountriesfor, 10; factoras cap- environment as formof social,66; gain and loss,68-69; in national ital investment,13-14, 17; failureto assess naturalresource and accounts,79; physical depredationof, 68; quantifying environmental environmental capitaland, 60; of renewable and nonrenewable natu- stocksof,44; relationto income(Fisher) of, 66; seirvice flows created ral resources,3, 9. See also Capital;Usercost approach by environmental, 63, 66; substitutabilityof, 62; use of salesof, 13. Depreciation:accountingfor, 3-4, 12-13; additionsin national ac- See also Capital, man-made; Depletion; Depreciation countsto ordinary,73; of capital,68; conceptin nonmarket account- Capital,man-made: accounting treatmentbySNAfor,3; consumption of, ing for,61; of nonrenewable resource,37 6, 20-22; depletion of, 9; expenditures for, 20; measurementof Deterioration,physical: as distinctfromeconomic depreciation, 60 consumption of,22 Developing countries:environmental accountingfor, 45-48; environ- Centralaccount(stockaccount). See Environmental accounting; Natural mentalinformation in, 4749; nationalaccountingmethodsin, 10; resourceaccounting nonremunerative sector of, 47; problemsof implementing environ- cEs (Conference of EuropeanStatisticians), 54, 80 mentalaccountingin, 47-50, 60-63; proposalsto implementenvi- Christiansen,Gregory, 78 n12 ronmental accountingin, 49-52, 63-64; resourceaccounting for,6; Churchman, C. West,57-58 n5 SNAaccountingtreatmentof natural resource revenue, 10; use of of outlays Classification of industriesby purpose(coIIw), 83 economicdepreciationin nonmarketaccountingin, 61; valuation of the functionsof government Classification (coFo(,), UnitedNations: methodsin, 63 data on pollutionmonitoring and abatement, 28 Disasterexpenditure: accounting treatmentfor,23 cowp (Classificationof outdaysof industriesbypurpose),83 Disbenefits:valuation of, 66, 67 Conference of EuropeanStatisticians 54, 80 (CEs), Discount rate, 14, 16. See alsoInterestrates Consumption: of environmental capitalservices, 63; of fixed,man-made, Donovan, D. G.,37 97 98 Index Dravie,ChristopheA., 50 IARIW-ECA (InternationalAssociation for Research on Income and DutchDisease, 10-11, 17 nl Wealth-Economic Commission 48 for Africa), ICORS(incremental capital-output ratios),12 Economic and SocialCommission for Asia and the Pacific(ESCAP), 48 Income:fromcapital,66; creatingpermanent streamof, 13-14; defini- Economic Councilof Japan,37 tion for sustainable,24; from depletable mineralresources,12-13; Economicdevelopment: preferencefor sustainable,55-56; standards distinctionbetween capitaland, 11, 17; Hicks'sconceptof, 2, 8, 9, for sustainable,35-37 11, 24, 90; Marshall's definition of, 8; true, of, 67-68; sustainability El Serafy,Salah,2, 4, 6, 18 n6, 20, 85, 89, 90 2, 4, 11, 13-14; use of conceptsof net and gross,13 Environment: benefitsand disbenefits of services generatedby assets Income,national.See Grossdomesticproduct (GDP); National income of,66-67; conceptual and measurement problems for darmage to, 80; (NI) effectof changesin qualityof, 72; estimateof effects of policieson, Income accounting,1 40; as form of capital, 23, 66; functionsof, 38 nl; methods to Incremental capital-outputratios(ICORS), 12 measurecomponents of, 65; programs to reversedegradation of,22; Industrialaccounts,73 standardsettingfor functionsof,35-36; statistics,19, 80 Industrialized plannedenvironmental countries: accounting in, 45 Environmental accounting: actions to start implementation of, 51-52; Information, environmental: bounded-knowledge as conceptto synthesis countryplans for,5, 37, 45; for developing countries,45-48; devel- combine, 56-57; in developing countries,47-49; and preference, 34; opmentof international structurefor,52; in France,40-53; andlink for socialdecisionmaking, 55; systemin Francefor,40-42. See also to SNA, 80; physicalunits in, 55; problems in countryimplementation Preferences; Valuation of,47-50, 60-63; proposalsfor developing countriesto implement, Input-output environmental analysis: servicesand damageas, 84; MEB 49-52; use for policymaking of, 49. See also Patrimonyaccounting; as extensionof,81; pollutionassessment using,26-28 Naturalresourceaccounting Institut National de la Statistique et des Etudes gconomiques (INSEE), Environmental capital.See Capital 81, 83 Environmental damage:accountingin modified nationalaccountsfor, Interestrates: as expression of value,55-56 73-76; correctvalue of actual,84; disasterexpenditureaccounting InternationalAssociation for Researchon Incomeand Wealth-Eco- for,23 nomicCommission for Africa(IARnW-ECA),48 Environmental protection.See Defensive expenditures International Unionfor Conservation of Nature and NaturalResources Environmental quality:measurement in theoretical, modified,and con- (IucN), 79 ventional nationalaccounts,76 Investment: use of grossand net conceptsin accounting for,67-68. See Environmental stock.See Capital also Capital ESCAP (Economic and SocialCommission for Asiaand the Pacific), 48 IUCN (International Union for Conservation of Natureand NaturalRe- Ewers,H.J., 38 n3 sources),79 Extraction,mineral: assessment of ratesof, 4, 16; depletionaccounting for, 12-14, 16 in, 5 Japan:resourceaccounting Jazsi,George,29 FDES (Framework for the Development of Environment Statistics),19, Johnson,HarryG.,66 80 Feyerabend, Paul, 57-58 n5 Kapp,K. W.,34, 38 n3, 54 Fisher,Irving,66 John M., 7 nl, 17n2 Keynes, Frameworkfor Environmental Satellite Accounting: proposed hand- Kneese,A. V.,26, 31, 38 n3, 65, 77 nl book for,90 Kuznets,Simon,32, 33, 34 Framework for the Development of Environment Statistics(IDES), 19, 80 Landefeld,J. S., 60 France:environmental satelliteaccounting, 83; resourceaccounting in, Leipert,Christian,2, 9, 33, 34, 83 5, 40-53 Leontief,Wassily, 65 Lind,Robert C., 61 Grainger,Alan,37 Little,1.M. D.,60, 64 n3 Gross domesticproduct (GDP): classesof expenditures usecl for, 33; Lorentsen,Lorents,5 conceptsfor environmentalprotectionand use of,84-85; correction for environmentalmeasurement of, 32-34; definitionand shortcom- M.60standards,90 ings of,1-2; macroeconomic analysis and, 13, 23; willingness-to-pay Macroeconomic analysis:use of grossand net productin, 13 methodto correct, 34-35. See also Nationalaccounts; Nationalin- Magrath,William, 6 come(NO) Marglin,StephenA., 64 n6 Grossnationalproduct(GNP), 1, 8; effectof environmental factors on, Marketmechanism: naturalresourcecapitaland, 61 71-72; theoretical modificationsto, 75-76; in U.S. national ac- Marshall, Alfred,12, 67-68 counts,70, 71 Materials-energy withSNA,80-81 balance(MEB): compatibility Measurement: correction of GDP,32-34; experiments for environmental Handbook: proposedfor integrationof input-output statistics,81; pro- cost,37; of marketvalueof abatement, 30-31; of preference,34-35 posedfor satellite accounting,90 MEB. See Materials-energy balance Harrison,Anne,2, 3, 6 Mirrlees,JamesA.,60, 64 n3 Hicks,John, 2, 8, 9, 11-13, 17 n2, 24, 79. See alsoIncome Mishan,E. J., 34 Hines,J. M.,60 Monetary accounting: in France,40 Hirsch,Fred,77 n9 Myrdal,Gunnar,49 Hotelling,Harold,12, 18 n4 HotellingRule,16 Nationalaccountingconcepts,70 Hueting, Roefie,3, 34, 37, 38 nl, 83 National correctionfor defensive accounts: in, 32-34, 37- expenditures Hufschmidt M.,57 nl 38; input-outputsystemsand, 81; measuringpollutionin, 26-31; Inidex 99 modification of structurefor,69-76; naturalproductionaccount for, Repetto,Robert,6, 63, 78 nI3, 81, 84 84; problemsand proposalsfor expanding,63-64; proposedtreat- Resourceaccounting: development of,4-5, 6;for flows and of materials ment of depletionand extractionin, 12-16; role of household pro- naturalresources,80-81. See also Environmental accounting;Natu- ductivity in, 71; theoryto linkeconomic and environmental data in, ral resourceaccounting; Patrimony accounting 65; in UnitedStates,70 Resourcestocks,44 Nationalincome and product account: comparisonof modified and Ricardo,David:andconceptof rent, 18 n5 conventional, 73-76; of theoretical economy, 70-73, 76 Robertson, Dennis,18 n7 Nationalincome(NI): in U.S.nationalaccounts,16, 70-72 Ross,M. S., 37 Naturalcapital.See Capital Ruggles, Nancy,77 n7 Naturalproduction account:as proposalfor nationalaccounts,84 Ruggles,Richard,77 n7 Naturalresourceaccounting: development of central accountfor, 42, Samuelson, Paul, 79 44, 51; treatmentof capitalby SNA in, 3 Satelson, 79 al, Naturalresourceeconomies. See Developing countries Satelliteaccounts:alternative statisticalsystemsas, 19, 24; in France, Natural resources:as assets with permanentincomest-eam, 13-14; 40; information on physical units in, 33; proposed environmental,82, effectof treatmentas capitalassets of, 21; exploitable and perma- 89. Seeaso Framework for Environmental SatelliteAccounting nent, 20-22; in French patrimonialaccounting, 44; importancein Saunders,C. T.,27 developing countriesof,13, 46-47; measurement of capitalconsump- Schulz,Werner,38 n3 tionof, 22-23; separation of capitaland incomefor depletable, 17 Seneca,J.d1., 30 Natural See resource Capital stock. Naturalresourcestock. SeeCapital ~~Services, environmental: benefits and disbenefits of, 66-67 Smith,Adam: distinctionbetweencapitaland incomeof, 11 Net domestic newconceptsfor environmental product (NDP): protection SNA.See Systemof National UnitedNations Accounts, and, 84-85 and, 84-85 Socialcost. See Capital; ~~~~~~~~~~~~~~Social restoration Costs;Disbenefits; cost, 83 Pollution Net environmental benefit: in modified natiDnal conventional account, Solow, Robert,12, 18 n4 73 SPIREmodel, 1 Netherlands: proposal for sustainable economic development in, 37 SPIRE model,40-41 Net nationalproduct (NNP): as sustainable socialnet nationalproduct SSDS (System of Socialand Demographic 80 Statistics), (ssNNP),8; in U.S.nationalaccounts, 70, 71 Statistics,environmental: methodsto improve,19; physicalstatistics Net product:in macroeconomic analysis,13,23 development for, 80 NI. See National income Statistisk Sentralbyra, 81 NNP. See Net nationalproduct Stimulation Programme for Research in Humid TropicalForest Lands Nonmarket accounting,1,55-56, 59-61 (Tropenbos), 37 Nordhaus, William, 79 Substitutability, 62 Norgaard,RichardB., 5, 6 Sustainability: of consumption, 11, 35; of development, 33, 37-38, 55- Norway: resourceaccounting in, 5, 81 56, 61; factorsof, 24-25; of incomeand output, 8, 11, 23-24. See also Economicdevelopment; Income;Net national product (NNP); Odum,E. P., 34 Preference OECD (Organisation Co-operation for Economic and Development), 28 Sustainable socialnet nationalproduct(SsNNP),8 Olson,Mancur,76 Systemof National Accounts (SNA),United Nations,1-2; balancesheets Organisation for Economic and Development Co-operation (OECD), 28 and reconciliation accountsin, 81-82; development of, 55; environ- mentaspectscovered by, 81-84: Framework for Environmental Sat- abatement PACE (pollution 28-29 and controlexpenditures), elliteAccounting and, 86; functional classificationsfor,83; inadequa- Page,Talbot,61 cies and proposedrevisionsof, 19, 24-25, 88-89, 90; omissionof Patrimony: description of natural,42-43 environmental accounting in, 5; proposalto combineeconomic and Patrimony accounting: as French approachto resourceaccounting, 5 environmental information in, 80; treatment of man-made andnatural 40-53; as part of environmental informationsystem, 40 resources by,3, 10 Pearce,D.W.,28, 31 System of Socialand Demographic Statistics (SSDS), 80 Peskin,HenryM.,2, 6, 30, 47, 57 nl, 63, 65, 78 n14, 84, 85 Taussig, M. K.,30 Peskin,Janice,30, 78 n14 Theys,Jacques,5, 33, 81 Physicalaccounting,80-82. See also Naturalresources; Naturalre- Tinbergen, Jan, 34 sourceaccounting Tobin,James,79 Physicaldepreciation, 68 POLLEN model,40-41 Ulrich,Werner,57-58 n5 Pollution:baselinefor measurement of,28; benefitsof abatement of, 2, UNEP (United Nations Environment Programme), 49, 80 28-31, 66; disbenefits associated with,66-67; measurement of,2-3, UnitedKingdom AtomicEnergy Authority,27 26-31; output,effects,and costsof,26-31 UnitedNations,19, 48, 79, 80, 81, 82, 83, 88 Pollutionabatementand controlexpenditures (PACE), 28-29 UnitedNationsEnvironment Programme (UNEP), 49, 80 Popper,Karl,57-58 n5 UnitedNationsStatistical Commission, 80-81 Preferences:for sustainable economic development. 35, 37-38, 55-56; UnitedNations StatisticalOffice(uNso),80 use of surveys to determine, 34-35 UnitedStates:nationalaccountsin, 70; proposedadditions to national Preventiveexpenditure. See Defensive expenditures accountsof, 73-77; resourceaccounting of environ- in, 5; valuation Price:determination of naturalresource,12;shadow, 32, 35, 60, 64 n3 mentalfunctions in, 63 U.S.Departmentof Commerce, 77 n7; Bureau of EconomicAnalysis 12 Quasi-rent, data for pollutioncostsof,28, 29, 73 UNSO (United Nations Office), Statistical 80 expenditure: Rehabilitation treatmentfor,22-23 accounting User cost approach,3-4, 7 nl, 14, 16, 17; in irreplaceable natural Rent,4, 10, 12 resource,12. See also Depletion factor;National accounts 100 Index Valuation: and concept of willingness to pay, 62-63; concepts and Ward, Michael,4, 85 methods for environmental, 67-69; of consumption of natural capital, Welfare,economic: concept and measurement of, 1, 79-80: definition 22; of depreciation of nonrenewable resources, 37; of environmental of, 55; loss by certain groups of, 38; maximization of, 66; as under- damage, 80; of nonmarket goods and services, 30, 55-56, 60; of lying concept for environmental accounting, 65-66; using national pollution abatement benefits, 30-31; as a reflection of social objec- income to indicate, 32 tives, 63; use of marginal, 67. See also Disbenefits; Nonmarket ac- Well-being:ability of national accounts to reflect, 70-72 counting; Willingnessto pay Willingness to pay: to avoid disbenefits, 67; to correct national income Valueaggregation, 55-56, 57. See also Environmental accounting; Non- accounting, 34-35; to obtain valuation of nonmarket services, 62- market accounting 63. See also Information; Preferences; Valuation Value depreciation: and income, 68-69 World Bank, 49; recommendations for accounting for defensive expen- van Tongeren, Jan, 85, 89 ditures and depletionldegradation, 88; recommendations of Group Victor, Peter A., 26 Meeting on environmental accounting, 86; and UNEP workshops, 80 World Commission on Environment and Development,79. 85-86 The complete backlist of World Bank publications is shown in the annual Index of Publications, which is of value principally to libraries and institutional purchasers. The latest edition is available free of charge from Publications Sales Unit, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. I UTHE WORLDBANK That the pressures for development may cause long-term damage to the environment and the natural resource base has become of increasing concern to environmentalists and economists alike. A great deal of work is now being done to clarify the linkages between development and the environment. Such work should make it possible to integrate concerns about environmental and natural resource management more effectively into the process of economic analysis and decisionmaking. An important problem has been that current calculations of gross domestic product (GDP), the most commonly used indicator of national economic performance, ignore the degradation of the natural resource base and view the sale of nonrenewable resources entirely as income. The papers in this volume were selected from a series of international conferences jointly organized by the United Nations Enviromnent Programme (uNEP)and the World Bank during the past six years. The authors are either economists, who argue that present methods for calculating national income fail to reflect the consumption of natural capital and that present practices inflate income from defensive environmental expenditures, or they are income statisticians, who offer ways to adjust for shortcomings in systems of national accounting. The combination of economic and statistical perspectives on enviromnental and resource accounting provided in this volume is rare. Throughout, the environment is treated as natural capital that needs to be accounted for and maintained. The authors both deal with the conceptual side of accounting and propose a variety of methods to help produce better measurements of income, which, in turn, could better guide economic policies in general and also encourage a more sustainable use of natural resources. Yusuf J. Ahmad is senior adviser to the executive director of the United Nations Environment Programme, Salah El Serafy is economic adviser on the Economic Advisory Staff in the Office of the Senior Vice President-Operations at the World Bank, and Ernst Lutz is a senior economist in the Environment Department, also at the W`orldBank. OTHER WORLD BANK PUBLICATIONS ON THE ENVIRONMENT Environment and Development: Implementing the World Bank's New Policies Development Committee of the World Bank and International Monetary Fund Environmental Management and Economic Development Gunter Schramm and Jeremyvarford, editors Forest Industries Sector: An Operational Strategy for Developing Countries Andrew J. Ewing and Raymond Chalk Government Policies and Deforestation in Brazil's Amazon Region Dennis J. Mahar Techniques for Assessing Industrial Hazards: A Allanual Technica, Inc. Wastewater MVanagement for Coastal Cities: The Ocean Disposal Option Charles Gunnerson, editor Wildlands: Their Protection and Management in Economic Development George Ledec and Robert Goodland ISBN 0-8213-1224-3