Environmental Accounting for Sustainable Development 1989

Public Disclosure Authorized Eni ronmental Accoulnting for Sustainable

Public Disclosure Authorized Development

edited by E' YusufJ. Ahnad Public Disclosure Authorized Salahi El Serafy Ernst Lutz Public Disclosure Authorized

A UJiNEP-WorldBank Symposium 4~~~~~~~~~~

i En4ronmentalAccounting for SustanableDevelopment

A UN.EP-World Bank Symposium I I I EnvironmentalAccounting for SustasinableDevelopment

editedby Yusuf J. Ahmad Salah El Serafy Ernst Lutz

The World Bank Washington,D.C. °1989 The InternationalBank for Reconstruction and DevelopmentI THE WORLD BANK 1818H Street,N.W., Washington, D.C. 20433, U.S.A.

Allrights reserved Manufacturedin the UnitedStates of America Firstprinting June 1989

The findings,interpretations, and conclusionsexpressed in this studyare entirelythose ofthe authorsand should not be attributedin anymanner to the WorldBank, to its affiliatedorganizations, or to membersof its Boardof ExecutiveDirectors or the countriesthey represent.

Libraryof CongressCataloging-in-Publication Data

Environmentalaccounting for sustainabledevelopment: selectedpapers from joint uNEPfWorldBank workshops I editedby YusufJ. Ahmad,Salah El Serafy,Emst Lutz. p. cm.-(A WorldBank symposium) Includesbibliographies and index. 1. Naturalresources-Accounting. 2. Environmental impactanalysis. 3. Nationalincome-Accounting. 4. Economicdevelopment-Environmental aspects. L. Ahmad,YusufJ. II. El Serafy, Salah. Im. Lutz,Ernst IV. UnitedNations EnvironmentProgramme. V. InternationalBank for Reconstructionand Development.VI. Series. HF5686.N3E58 1989 333.7'14-dc2O 89-33458 ISBN0-8213-1224-3 CIP Foreword

Internationalorganizations are making a substantialef- way must be found to measure the prosperity and pro- fort to incorporateenvironmental concerns iin their regu- gress of mankind. laroperations. A great deal of work is nowbeing done to help clarifythe linkages between developmentand the We have witnessedincreasing pressure on the environ- environment.This workwill enable us to irntegrateenvi- ment and the natural resource base. We have come to ronmentaland resourcemanagement concerns more ef- understand that, where te environmentis concerned, fectivelyin the economicdecisionmaking process. It will "there is no such thing as a free lunch" and that someone be an essentialcomponent in our effortsto establishthe will eventuallyhave to bear the "external costs" of pro- basis for long-termand sustainabledeveloprnent. duction and consumptionactivities. We must learn to dis5tinguishbetween true incomegeneration and the draw- Environmentalaccounting is 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 nationalincome more accuratelyrepresent true, "sus- six years by the World Bank and the United Nations tainable"income. The current systemof nationalincome EnvironmentProgramme, as wellas others, to this impor- accountinghas some limitations.Gross domesticproduct tant topic. We hope it will help bring about a needed (GDP) figuresare widelyused by economists,politicians, changein attitudeand perceptionabout this issue. and the media. Unfortunately,they are generally used without the caveat that they represent an income that Barber B. Conable MostafaTolba cannotbe sustained.Current calculationsig5nore the deg- ExecutiveDirector radationof the natural resourcebase and viewthe sales President United Nations of nonrenewableresources 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 Ernst Lutz Shortcomingsof the CurrentNational Income Measures 1 The Necessityof MeasuringSustainable Income 2 DefensiveExpenditures 2 The Depletionand Degradationof NaturalResources 3 ResourceAccounting 4 LinkingEnvironmental and ResourceAccounts to the SNA 5 ConstructingEnvironmental and ResourceAccounts for DevelopingCountries 6 A Varietyof Approaches,but a CommonTheme 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 ConceptualBackground 11 Weaknessof the DepreciationApproach 12 Conversionto a PermanentIncome Stream 13 Clarificationof the UserCosi, Approach 14 Conclusion 17 Appendix.Splitting Receipts into Incomeand Capital 17 Notes 17 References 18

vii viii Contents

4. Introducing Natural Capital into the SNA 19 Anne Harrison ExploitableResources 20 PermanentResources 20 Valuationof the Consumptionof NaturalCapital 22 EnvironmentalEnhancement Programs 22 UnplannedOccurrences 23 Sustainabilityand the SNA 23 Summaryof Recommendations24 Note 25 References 25

5. Measuring Pollution within the Framework of the National Accounts 26 Derek W Blades The Output of 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 GDPwith Proper Caveats 32 CorrectingNational Income for DefensiveEnvironmental Outlays 33 ComplementingCorrections for DefensiveOutlays through Surveys 34 ComplementingCorrections for DefensiveOutlays through Standards for Sustainable EconomicDevelopment 35 Notes 38 References 38

7. Environmental Accounting in Development Policy: The French Experience 40 JacquesTheys The French StratifiedSystem of Information 40 AdaptingEnvironmental Accounts to DevelopingCountries 45 Proposals 49 Conclusion:Toward a Programof Action 50 Appendix.Nomenclatures of the French NaturalPatrimony Accounts 52 Notes 53 References 53

8. Linkages between Environmental and National Income Accounts 54 RichardB. Norgaard SNA Developedby 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 ExpandedAccounts in DevelopingCountries 59 ImplementationProblems 60 SuggestedCourse of Action E3 Notes 64 References 64

10. A Proposed Environmental Accounts Framework 65 Henry M. Peskin Theoryof EnvironmentalAsset Services 65 ValuationConcepts 67 Investmentand Depreciation 67 Sourcesof EnvironmentalAsset Depreciation 69 Overviewof the NationalAccounting Structure 69 Responseof ConventionalAccounts to Nonmarketand EnvironmentalActivity 71 A ModifiedAccounting Structure 72 The Environmentand the ModifiedAccounts: Options for ModifyingGNP 76 Notes 77 References 78

11. Environmental Accounting and the System of National Accounts 79 Peter Bartelmus EnvironmentStatistics and PhysicalAccounting 80 Environmentand Natural Resourcesin the SNA 81 MonetaryEnvironmental Accounting 82 Indicatorsof SustainableProduct and Expenditure 84 FutureWork 85 Notes 86 References 86

12. Recent Developments and Future Work 88 Ernst Lutz and Salah El Serafy

SNA Expert GroupMeeting (Vienna, March 1988) 88 Joint UNEP-WorldBank Expert Meetingon EnvironmentalAccounting and the SNA (Paris, November1988) 89 SNA Expert GroupMeeting (Luxemburg, January 1989) 89 Future Work 90 Annex.The Treatmentof NonreproducibleAssets, Stocks, and Flows under PresentSNA and "M.60"Standards for ReconciliationAccounts 90 References 91

Appendix. Participants at the uNEP-World Bank Workshops 93 Index 97 I I I Preface

This volume contains selected papers from a series of Numerousparticipants at the workshopsmade signifi- workshopsjointly sponsored by the WorldBank and the cant contributions, either by presenting papers or by United Nations EnvironmentProgramme (UNEP). UNEP substantialparticipation in the discussions.They are too was created at the StockholmConference in 1972. Dur- manyto acknowledgeindividually; instead we havehad to ing the past seventeenyears, membersof its Governing content ourselveswith listing the names and affiliations Council have urged UNEP to help clarify the linkages of all participantsin the appendix to the text. Of the betweendevelopment and the environment.T he council more than thirty papers or notes that were presented, we believedthat such clarificationwould help integrateissues have selectedthe seventhat appearedto us to have pro- of environmentaland resourcemanagement ooncern into vided broad insightsor brought out new aspects of a the frameworkof economicdecisionmaking and thiuspro- complexand sometimeselusive subject. In addition, we vide a basis for long-termand sustainabledevelopment. have includedthree contributionsthat werewritten after- In 1982, UNEP'S Session of a Special Character,which ward by workshopparticipants (Chapters 4, 9, and 10). commemoratedthe tenth anniversaryof the Stockholm In general, the papers indicate current thinking on the Conference,requested the executivedirector to develop issue of environmentaland resource accounting.Readers methodologicalguidelines for developingcountries on en- interested in examiningpapers not included in this vol- vironmentalaccounting and its use in developmentpolicy ume are encouragedto contact the particularauthors. and planning. The chapters in this volume reflect different aspects In February1983, UNEP conveneda consultativemeet- and approachesto environmentalaccounting. They are ing under the chairmanshipof YusufJ. Ahmad,assistant concernedmostly with financialand economicconsidera- to the executivedirector and director for specialassign- tions and the prospects of modifyingthe U.N.System of ments at UNEP. The main objectiveof the meetingwas to NationalAccounts (SNA) to reflect issues of environmen- ascertainwhether environmental accounting could be de- tal and natural resourceconcern. velopedas a publicpolicy tool, based on the present state In publishingthis volumewe have receivedencourage- of the art. Robert Goodlandwas the only 'WorldBank ment, support, or comments from Ramesh Chander, representativeat that first meeting.He subsequentlypro- Vinod Dubey,Stanley Fischer, Robert Goodland,Ken- vided much leadership and encouraged economiststo neth Piddington,Ibrahim Shihata, MichaelWard, and focus on these critical issues. He and Yusuf J. Ahmad, JeremyWarford. Salah El Serafy,and Jacques Theys chaired the subsequent workshops,which were sponsoredjointly by UNEP YusufJ. Ahmad and the WorldBank. Salah El Serafy Ernst Lutz

xi Abbreuiations

CES Conferenceof EuropeanStatisticians isic Internationalstandard industrialclassification coFOG Classificationof the functions of government IUCN InternationalUnion for Conservationof Nature (expenditures) and NaturalResources COIP Classificationof outlaysof industriesby purpose MCLA MonetaryCenter for Latin America(also CEMLA) CPC Centralproduct classification MEB Materials-energybalance ECA EconomicCommission for Africa NDP Net domesticproduct ECE EconomicCommission for Europe NNP Net nationalproduct ECLA Economic Commission for Latin America NRA Naturalresources accounting (alsoCEPAL) OECD Organisationfor Economic Co-operationand EPP EnvironmentProtection Program Development ESCAP Economicand Social Commissionfor Asiaand OPEC Organizationof PetroleumExporting Countries the Pacific PACE Pollutionand abatementcontrol expenditures FAO U.N.Food and AgricultureOrganization SGDE Sustainablegross domesticexpenditure FDES Frameworkfor the Developmentof Environment SGDP Sustainablegross domestic product Statistics SNA U.N.System of NationalAccounts GDFCF Grossdomestic fixed capitalformation SNDP Sustainablenet domesticproduct GDP Grossdomestic product SNNE Sustainablenet nationalexpenditure GNP Grossnational product SSDS Systemof Socialand DemographicStatistics LARIW International Associationfor Research on In- UNEP U.N.Environment Programme come and Wealth UNESCO U.N. Education Scientific and Cultural ICOR Incrementalcapital-output ratio Organization INSEE InstitutNational de la Statistiqueet des Etudes UNSO U.N.Statistical Office Economiques WHO WorldHealth Organization

xii Contributors

YusufJ. Ahmad RoefieHueting Senior Adviserto the executivedirector, U.N. Environ- Head, EnvironmentalStatistics Department, Central Bu- ment Programme,Nairobi, Kenya reau of Statistics,Voorburg, Netherlands Peter Bartelmus Ernst Lutz Chief,Environment Statistics Section, U.N. Statistical Of- Senior Economist, Environment Department, World fice, NewYork, U.S.A. Bank, Washington,D.C., U.S.A. Derek W. Blades RichardB. Norgaard Principal Administrator,Economics and Statistics De- AssociateProfessor, Energy and ResourcesGroup, Uni- partment, Organisationfor EconomicCo-operation and versityof California-Berkeley,U.S.A. Development,Paris, France Henry M. Peskin HermanE. Daly consultant,Silver Spring, Md., U.S.A.(formerly with Re- Senior Economist, Environment Department, World sourcesfor the Future) Bank, Washington,D.C., U.S.A. JacquesTheys Salah El Serafy Head of Mission,Ministry of the Environment,Paris, EconomicAdviser, Economic Advisory Staff in the Office France of the Senior Vice President-Operations,Norld Bank, Jan W. van Tongeren W.Mashington,D.C., U.S.A. Chief,National Accounts Section, U.N.Statistical Office, Anne Harrison NewYork, U.S.A. Consultant,Stockbridge, United Kingdom(formerly with the WorldBank)

xliii I I I Environmentdland ResourceAccounting: 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 economic and economists,and politiciansthus make frequentuse of the populationgrowth have occurred,they have increasingly nationalincome measure of gross nationalproduct (GNP) put pressureon the environmentand the natturalresource and its variants, such as GDP (gross domestic product) base. Yearsago, when the pressure wasstill small, econ- and NNP (net nationalproduct) for a varietyof purposes. omistsmay have been justifiedin makingno referenceto GDP, the most commonlyused 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 activity for which exchange occurs in monetary duction and consumptionprocess. But there is little jus- terms withina givenyear. It is valuablemostly for indicat- tificationfor this now. ing short- to medium-termchanges in the level of eco- Economistshave consideredthe side-eifectsof produc- nomic activity,and it is particularlyuseful for demand tion and consumptionactivities to be "externaleffects." managementand 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 sustainablegrowth partly because natural resourcedeple- systemas a whole.Although this systemis generallylarge, tion and degradation are being ignored. Furthermore, it is neverthelessfinite, and in certain respectsit is subject GDP is often used inappropriatelyas an indicatorof "wel- to great stress. The realizationis growingthat, wherethe fare," frequentlywithout any caveat about its shortcom- environmentis concerned, "there is no such thing as a ings for that purpose. The concept of welfare is much free lunch" and that someonewill eventually have to bear broader than a monetarymeasure of income. It covers those "externalcosts." If a broaderview is talken,environ- manydimensions of subjectivewell-being other than those mental costs would be internalized in the production that involvemarket transactions or that can be measured processes. In this connectionit is essential to reckon in monetary terms, particularlyfor people whose basic costs and benefitsproperly and to distinguishclearly be- materialneeds have been met. tween true income generationand the drawingdown of As most economistsknow, there are severalcontrover- capitalassets by resourcedepletion or degradation.This, sial issuesconcerning national income accounting as 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-livedconsumer dur- IncomeMeasures ables. This chapter willnot deal with any of those issues; instead it addresses certain environmentaland natural Income accounting,if properly done, is a most useful resourceissues as they relate to the proper measurement tool for economicanalysis and policyprescriptions. It can of incomeand variationsin assets. GDP, as measuredat indicatethe levelof economicactivity, its variationsfrom present, does not adequatelyrepresent true, sustainable year to year,the size of savingsand investment,the limits incomebecause of two shortcomings.These concern the society can consume out of its current receipts, factor treatment of environmentalprotection costs and the deg- productivity,industrial structure, comparativeperform- radationand depletionof natural resources.The fact that

1 2 Salah El Serafy and Ernst Lutz these issues are not properly dealt with in the current stream of incomegenerated by economicactivity. It has U.N.System of 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 measurementsproduced under the SNA rather as intermediateexpenditure. can be faultyto the extent that GDP does not adequately A conceptuallydifferent approach can be taken by con- reflectenvironmental and natural resourceerosion. sideringresources such as water,air, soil, and so forth as natural capital.When such capital is drawndown or de- The Necessity of Measuring Sustainable graded, this shouldshow up as consumptionin the meas- Income urements of national income whether or not defensive expendituresare actually being incurred to correct for True income is "sustainable"income. This is a key the negativeeffects and restore the drawn-downnatural True~~~ ~ ~ ~ ~ ~~~ ~cptl Themdifrec betweenletheme defesiv expendi- pointstressed by Daly(Chapter 2) and El Serafy(Chapter captal. The dlifferencebetween the defensiveexpendi- 3). True income can be thought of as the maximum tures actuallyincurred and the depreciabonof the envi- amount that can be consumedin a given period without ronmentalcapital wouldbe reflected at the level of net reducingthe amountredcinof th possibleossbleconumpionin amuntofconsumption in a futurefuure poseddomestic by Harrison product and(NDP). outlined This inapproach more detail has inbeen Chapter pro- 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), who proposesthe introductionof a ionce;pit lncosehsrede incoed The. esenc ot nature account in additionto the standard accounts for concpthasbee f icom sttedby Sr Jhn ick as households,industry, and government.Aside from the the maximumvalue that a person can consumeduring a 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, Prudentofudnthperiodoma economic managementmanatghembeginng requires(uics 1946, that p.o172).govern- the greatest difficultylies in actuallyestimating the level ments knowthe maximumamount that can be consumed of environmentalservices and damages. by a nation without causing its eventual impoverishment. Measuring Pollution within the sNA Framework It is important,therefore, that nationalincome be measured 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 satisfactorily:the so-called "defensiveexpenditures" to tant area in fromtheir accountsngs-is an protector restore the environmentand the depletionand imp re inwichntental aconts clde degradatioresourcesused of natura to Improveenvironmental policymaking.Blades degradationof natural resources. (Chapter 5) distinguishesfour aspects of pollution and considersthe extent to which it is possibleand usefulto Defensive Expenditures measurethem withinthe frameworkof the national accounts. These aspects are the output of pollutants, the Actionis often taken to defendthe environmentagainst damagesof pollution, the costs of abatement, and the encroachmentby economicactivity, and the SNAtreats its benefitsderived from it. cost as generatingincome. Defensive expenditures can be Althoughit maybe feasibleto use nationalaccounts to large or small, depending on where the boundariesare measure the output of pollutants,the informationso ob- drawn.This volume considers only defensive expenditures tained maybe too generalto be useful for environmental againstthe unwantedside-effects of productionand con- policymaking.Chapter 5 notes that although there are sumption (such as pollution)but not those relating to conceptualand practicaldifficulties in estimatingthe total national security,even though similar arguments would costs of pollutiondamage, it wouldbe possibleand help- applyto them. The most obviouscategory to be included ful to identifysome of the main costs that are already under defensiveexpenditures is the cost of environmental includedin the nationalaccounts but are not shownsep- protectionactivities. Another possible category would be aratelyat present. The costs of pollutionabatement are a car repair and medical expenses as a result of traffic part of defensiveexpenditures. They have been measured accidents. Leipert listed other costs that might be in- in severalcountries and have been incorporatedin mac- cludedand recentlymeasured the defensiveexpenditures roeconomicmodels to 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 mental policymaking,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 consumptionactivities in the abatementcosts. Finally,although it wouldbe interesting Environmentaland Resource Accounting: An Overview 3

to measure the "market valuation"of the benefits of fectedin developingcountries in whichnatural resources pollutionabatement, the practicaldifficulties involved are are exploitedby the public sector. enormous,and it wouldgenerally not be feasibleto incor- Underlyingthis asymmetryis the implicit, as well as porate such data in the national accountson a regular inappropriate,assumption that natural resources are so basis. abundantthat they are costlessor haveno marginalvalue. Historicallythey have been regarded as free gifts of na- Measuringthe Differencebetween Environmental ture-a bias that providesfalse signals for policymakers. Standardsand Actual Behavior This approachignores the depletionof valuableresources and confusesthe sale of commerciallymarketable natural Hueting(Chapter 6) discussesseveral w& s toDdeal with assets with the generationof income.Thus it promotes defensiveexpenditures and lists the pros and ons of the and seemsto validatethe idea that rapid economicgrowth defensiveandexpenditures lists the ps ad ccan be obtained by exploitinga resource base that may variousoptions. Since he is skepticalabout the usefulness be rapidlydiminishing. The growthcan be illusory,and of the willingness-to-pay-method,he prefers th't environ- the prosperityit engenderstransitory, if the apparent gain 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 healtuchstandasutiale dev beent. ost ofe Iteleast part of the receipts is not redirectedinto new pro- ingldsuho standards would nthenb etimted. s These rosts ductive investments.As income is inflated, often con- would show how far a country has 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 .t Althougtheh wouldap- cent about its economic performance;as a result the poach ,ha inuitiven appa, dterm ingthecost wol adjustmentin economicpolicy gets delayedby the seem- oinkagesbetween production 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. Generallyspeaking, the issue of the treatmentof defen- not guarantee that improveddecisions will actually be siveexpenditures for nationalaccounting assumes greater made. significancethe higher the degree of industrializationof Existing natural capital of geological(nonrenewable) the countryconcerned. The issuesof depletion and deg- and biological(renewable) resources as well as of flow radation, which are considered below, ar-enot directly resources(such as water and air) is needed for industrial raain whc ar cosdee below, ar.o drcl and agroindustrialproduction. New geologicaldiscover- related to the levelof industrialization,however, although aswa astreyl anduconservation, dosnovers they seem to be particularlyrelevant to countries that tes, as well as recyclkg and conservaton, do not reverse base their economicactivities on the exploitationof nat- the depletion of known stocks. The newly discovered ural resources. stocks themselvescome from a finite stock of resources, and they merelyextend the time span over which depletion can continue. Depletion of renewable natural re- The Depletion and Degradation sources can have serious indirect effectsby reducingthe of Natural Resources sustainable flow needed for industrial inputs and eco- systemservices. There is an evident asymmetryin how the SNA treats Similarly,crop productionat the expenseof soil erosion man-madeassets and natural resources. Man-madeas- cannot be sustained.Only carefulhusbandry of 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.Natural resourceassets ment that human ingenuityis bound to find substitutes are not so valuedor adequatelyaccounted ifor in most for the naturalresources being depleted may be generally instances,however, and their loss produces no charge in valid, but it would be imprudentfor societyto base its the national accounts against current income to reflect behavioron such optimismand wouldbe wrongfor econ- the decrease in potential future production.If a country omists and 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 conceptualapproaches to deal with the de- natural assets that willeventually disappear. Differences pletion or degradation of natural resources have been in recording under the SNA may arise depending on proposed:the depreciationapproach and the "user cost" whethera resourceis publiclyor privatelyowned. Private approach. The principle of depreciationof man-made companiestend to take a long viewof the natural assets capitalcan be appliedstraightforwardly to the consump- they own, and many make provisionfor the decrease in tion of capitalembodied in 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 taxable income.No such exclusionis ef- degradationcomes in physicalunits, this must be priced 4 Salah El Serafy and Ernst Lutz

or valuedin some way before some adjustmentcan be R-X would be the "depletionfactor" (or user cost) that made to GDP to arrive at a corrected net product. Valua- should be set aside and allocated to capital investment tion couldbe basedeither on the principleof replacement and excluded from GDP, while X would represent true, cost,where replacement is possible,or on (the discounted that is, sustainable,income. value of) willingnessto pay. Present conventionswould This method is flexible enough to handle changing valuethe depletedor degradedresources at currentprices levelsof extraction,movements in the discount rate, and where available.If such a correctionwere effected,the alterations in reserve estimates. Such alterations would grossproduct would remain unchanged, but the net prod- includenew discoveries,which would change the reserve- uct wouldbe adjustedto reflect the depreciationof envi- to-extractionratio. In the aboveformula this is denoted ronmentalcapital that has occurred during the account- by n, that is, the life expectancyof the reserve measured ingperiod. in years at the current period's extraction rate. The Because the depreciationapproach would leave GDP method is not concernedwith valuingtotal reserves,but unadjustedand because it would wipe out from the net onlywith the fractionof the resourcebeing liquidatedin product the entire proceedsfrom natural resourcesales, the current accountingperiod, whichis valuedat current the user cost approach (see Chapter 3) has been pro- prices.That fractionrelies entirelyon physicalquantities, posed as a wayof properlytaking accountof depletionof since the price is the same in the numeratorand denom- mineralresources. Possession of a natural resource con- inator.The method can be adapted to deal with mineral veyson its owneran incomeadvantage that is deniedto extractionunder conditionsof deterioratingquality of 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- usuallymine the richer depositsfirst, leavinginferior de- duced by the depreciation method. The user cost ap- posits for later periods,thus inevitablyraising the cost of proach avoidsthe difficultiesof putting a value on the futureextraction. stock of the resource, but it relies on the consciousas- This method, like all accounting methods, does not sessment of current extraction rates in relation to the indicatean ex ante optimalrate of depletion,but merely total availablestock, measuredin physicalterms. Depend- mirrors decisions already made by the resource owner ing on the rate of depletion and on a discountrate, the about liquidatinghis natural resource.The ownerusually revenuefrom the sales of a depletableresource, net of determineshis extractionrate in the lightof manyfactors, extractioncost, can be split into a capitalelement, or user includinghis expectationof future price changes. If he cost,and a valueadded element, representing true income. decidesto extract 20 percent of his reservesin one year, T-hecapital element representsasset erosion,and it has then n in the aboveformulation is equal to 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. Unlike the 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 method wouldbe in harmony reinvestment58 percent of his net receipts, and willthus with accountingprinciples and woulduse current market enjoy 42 percent as current income. The correction pricesfor valuationpurposes, but it wouldrequire a rule- needed to reckon "true" incomeout of natural resource of-thumbdiscount rate for convertingthe capitalsales into sales is higher the nearer the resource is to exhaustion, an incomestream. It is also rootedin a proper understand- and lowerthe longerits life expectancyat current extrac- ing ofthe economicmeanings of "valueadded" and "rent," tion rates. Onlya 1 percentreduction would be necessary whichshould not be confusedwith assetsales. in net receiptsto arrive at "true" incomeusing a 5 per- How the net revenuecan be split into user costs and cent discountrate if the resourceis beingliquidated over true incomeis explainedin Chapter3. One needs first to 100 years. The choice of the discount rate materially decideon a discountrate, r, say 5 percent. Second,one affectsthe calculation.A high discount rate, which de- has to determine the number of periods, n, over which presses future 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 which to sink the depletion amount is extractedin the current period. Then the for- factor (R-X) so that it can yieldthat much as a return.' mula developedby El Serafy (1981) is used to calculate the ratio of true income,X, to net receipts (exclusiveof Resource Accounting extractioncosts), R: For resourceaccounting, data need to be collectedon

1X/R 1 - renewableand nonrenewablenatural resourcesprimarily XIR = I)n+1*for the purposeof planningtheir long-runexploitation in (1 + r)~~1 pursuitof sustainableeconomic activity. Several industrial Environmentaland ResourceAccounting: An Overview 5 countries,including Canada, France, Japan, Norway,and urements in physicalterms. Physicalmeasurements are the UnitedStates, have developedresource accounts that clearlyessential, and without them accountingin mone- are tailoredto their availableresources and pollicypriori- tary terms is impossible.Built into the French approach ties. Some of the important features of the F'renchap- is the assumptionthat a comprehensivephysical inventory proach to resourceaccounting are describedbelow. systemmust be in place beforeany changescan be pro- Insteadof the term "resource accounting"the French posed in nationalaccounting methodology. This is a point use the expression"patrimonial accounting," which could of viewshared by many,but there are many others who be describedas "accountingof the nationalenvironmen- wouldwant to see nationalaccounting methods adjusted tal heritage" (Theys,Chapter 7). This is broader than graduallyas measurementsbecome available. 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 imnportedto The current versionof the SNA, whichhas been in effect make economicgrowth possible. Such a syst.emwould since 1968, does not contain an explicit environmental also help to optimize the economic value of available dimension.The ongoing SNA revisionwas mandated by 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 economicgrowth so that it does The Commissiondesired to maintain consistency in not threaten ecosystems. time series, even if the series containedconceptual short- When fully developed,the systemwould be versatile comings. and serve various ends. It would optimize the use of Amongenvironmentalists and economistswith environ- natural resourcesas factors of production (for example, mental and resource concerns, there are severalschools inversionof a quantitativeinputloutput table that would of thought about the best approach to the accounting indicatethe intermediateuse of natural resourcesin the problem (Norgaard,Chapter 8). Some advocateenviron- productiveprocess); it would describe the economicas- mental accountingin physicalterms and have little inter- pects of resourceuse (such as which resourceswould be est in establishingany linkagewith the SNA. Their aim is marketedand in what quantities and values,how to im- to use indicatorsof physicalchange to influence public provethe productivityof processingindustries to opti- opinionand environmentalpolicies. At the other end of mizethe use of natural resources,and what the opportu- the spectrumare those who feel that environmentalac- nity costs are of alternatives);it wouldtreat resourcesas countingwould not have an adequate effect unless the "environmentalgoods" (taking into account changesin accounts are monetized and integrated into the SNA, the qualityof the environment,the costs and benefitsof whichwould produce an adjustednational income that is environmentalpolicies, and the economicconsequences more sustainable. of alternativeenvironmental policies); and it wouldtake We believethat environmentalaccounting in physical stock of the national environmentalheritage and define terms is essential,particularly as this wouldcover collect- 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 comprehensivesystem are nec- we recognizethat "monetization,"to the extent possible, essarilylimited, stress is placed on satisfyingthe needsof is important as well and that a linkagewith the SNAand the policymaker.Although it would be easier to collect an adjustmentof the current incomeconcepts and meas- environmentaldata 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 believe that more conceptual and for developinga systemof environmentalaccounts is 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 why we, as an interim step, encourage comparablein time and space. The long-termgoal is to the constructionof satelliteaccounts, linked with the SNA, match the standards already reached by national (eco- in which the adjustmentswould be made (see Chapter nomic)accounting, which make the SNA such a powerful 12). In other words,by havingsatellite accounts, the user planningtool for short-termeconomic management. couldcompute sustainable GDP and NDP (SGDP and SNDP) The French approachis only one amongsseveral being in them. This half-waysolution would not represent a pursued in industrialcountries (for example,Norway has threat to the historical continuityof 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 Lorentsen 1987).The French approachis countantsmay take the issues discussedhere more seri- to build up balance sheets of resourcesand to monitor ouslyand might eventuallybe willingto adjustthe core of their change from year to year, with emphasison meas- the SNA itself. 6 Salah El Serafy and Ernst Lutz

Bartelmus(Chapter 11) discusses variousoptions for faultypolicy advice. Such readingsfrequently exaggerate linkingor integratingenvironmental and resource issues income and thus encourageconsumption and promote with or into the SNA. His chapter was commissionedby habitsof behaviorthat cannot be sustainedover the longer the workshoporganizers to summarizethe views and term. approachesexpressed at the workshops. An interestingargument over "desirableand practicable" adjustmentis highlightedby the approachesregard- Constructing Environmental and Resource ing depletableresources of Harrison(Chapter 4) and El Accounts for Developing Countries Serafy (Chapter3). Both are in fundamentalagreement about what constitutessustainable income and 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 sNAby preservingthe definitionof final demand make progressnow at an operationallevel so that government officials,national accountants, and economistsalike capital as a parallel entry to consumptionof man-made cantsee howf, natioincluenvironntalt and resucon-mistsali capital,with appropriate adjustments 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 measures should exclude all capital cers i th cacultins.Butits cea tht te dvelp- consumptionand therefore that net products should be ment of environmentaland resource accountswill take usdto ind theleve of eoni ctivityuad it time. This fact,time.~~~~~~~~~~~~~~ however,should Thsfc,hwvr.hudntke not keep statisticalttsia and n developmentused to indicateover the time. level El Serafy,of economicby contrast, activity would and re- its planningofficials in developingcountries from initiating defelthendistinctioet intermeit and finlde- relevant work now, especiallyon minerals or forestry, mand th at theeo n atu and finalde- wheredata to a large extent are alreadyavailable. In the bved basgeing sale of natural capitalmust not case of Indonesia,Peskin (Chapter9) argues that a local researcheffort should start right away,supported initially of that incomeshould be excludedfrom GDP itself,as well withperiodic consultant inputs. Ideallynot only environ- as from the net product. Thus the GDP measurement mentalhbut also other important nonmarket factors couldcontinue to be used extensively,as is now the case, metl bu als ote imoran nonsarket factorsndgidcooicpliy should be consideredin an expandedaccounting struc- to describeperformance and guideeconomic policy. ture. This iea iselabortediChaptrNorgaard(Chapter 8) is skepticalabout the economists Repetto and others (1987) have applied resource ac- and accountants concernedabout the environmentever Reetito feand fothers( resourcer ac- being able to agree on a set of corrections that would counstinto feliand forvestrreourest g ionesa. For simplyrectify and fill in gaps in the existing SNA to pro- radationnet of regrowthand suggestedthat it be treated duce one aggregatefigure expressedin monetaryterms. rike depreciationof man-madeassets, that is they pro- He claims that the existing SNA contains contradictions likeddereduciaong oe maN-aD e assets,thmatedis,pthep o becauseit is basedon conventionsand reflects consensus posed reducing the NDP by the estimated depletion.A similarapproach was followedfor valuingthe depletionof rather than being built on deductivereasoning. He does fulmreservesacht wasee rservationsabout this aetnd an not viewsustainability as 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 Serafy do, but as an alternat proposalsive inE Sersa1y a ter3. Another "ethical" goal, representing a "separate social objective empirical stude Maona and Aoilren18 esiaTed thea of development strategies." He believes the undervalua- cost~to the.~ ecnm ofsi rsonJv Th. anua tion of the concerns of future generations reflects the amountestimated was US$350 million to US$415million, whichis slightlyless than 0.5 percent OfGDP. More than nonparticipationby future generationsin the capitalmar- 95 percent of this cost is the on-site cost of declining kets of today. productivity.These two studies have madevaluable . conA more conventionalview would ascribe such underval- productivity.Thnese two studies have made valuablecon- 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 futuregenerations will never be able to participate in today's capital markets, A Variety of Approaches,but a CommonTheme the surest way of reflecting their preferences is to use lowerdiscount rates. Norgaard is raising questions re- A varietyof approachesfor amendingthe SNA are pro- garding the economicapproach to the "sustainabilityof posed by variousauthors in this volume.This, however, development,"which is based on accountingthat relies should not detract from the central theme argued by all on market valuations.He espouses "methodologicalplu- of the authors: in their present form the guidelinesfor ralism" in the belief that a multiplicityof perspectives income calculationunder the SNA leave out important wouldensure that "all valuesare respected to the extent aspectsof economicdevelopment that shouldbe brought possible,"so that decisionmakershave informationalert- into the accounts.These guidelines now produce readings ing them to "as many aspects of environmentaland re- of levelsof activityand growthover time that can lead to source phenomenaas possible."Norgaard, however, does Environmentaland ResourceAccounting: An Overview 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 Energy and Development7(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 UniversityPress. pants have expressed different points of vievw,but the Keynes,John Maynard.1936. The GeneralTheory of 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 EconomicIssues 20(1):109-31. concept and measurements-a common thread in all the . 1987. "DefensiveAusgaben in der Bundesrepublik contributions included here. Deutschland,1970 bis 1985: AbsoluteWerte und Relations- zahlenmit dem BSP."International Institute for 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 Natural ResourceAccounting Approach." cost" in relation to capital equipment.He defined it as the WorldResources Institute, Washington, D.C. Processed. "maximumnet valuewhich might have been 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." (See chap. 6 and its appendixof his GeneralTheory.) Schramm,Gunter. 1986. "PracticalApproaches for Estimating Projectanalysis of depletableminerals has also made use of the ResourceDepletion Costs." In EdwardMiles, Robert Pealy, concept of user cost at the micro level (see, fcr example, and Robert Stokes, eds.,Natural Resources Economics and Schramm1986). PolicyApplications: Essays in Honorof James A. Crutch- field. Seattleand London:University of WashingtonPress. References UnitedNations, Economic Commission for Europe. 1987. En- vironmentStatistics in Europe and North America:An Ex- Alfsen,Knut, TorsteinBye, and Lorents Lorentsen.1987. Nat- perimentalCompendium. New York. 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- CentralBureau of Statisticsof Norway. mies. DevelopmentCentre PublicationCDIR(82)3010. Paris: El Serafy,Salah. 1981. "AbsorptiveCapacity, the Demandfor OECD. 2

Towarda Measureof SustainableSocial Net NationalProdudt

Herman E. Daly

SustainableIncome ment of NNP overestimatesthe maximum net product availablefor consumption.Consequently, NNP increasingly Thecentral criterionfor definingthe conceptof income fails as a guide to prudent conductby nations. has been wellstated by Sir John Hicks: Twoadjustments to NNP are needed to make it a closer approximationto Hicks' concept of income and a better isthgivepurpose of incomcalctionsof ine practicl aairs guide to prudent behavior.One adjustmentis simplyto to giv pople antindicationeofsthegamountewhich extendthe principleof depreciationto coverconsumption theyoang onu without,impoverishin th mse le, of natural capital stocks depleted through production. defollingmans out idea, it woldsem tat weo h The other is to subtract defensiveexpenditures, or regret- dfne acan'suduincome as theekmandstimu valuecwhce a tableexpenditures necessary to defendourselves from the can consumeduring a week, and stll expect to beg unwantedside effects of our aggregate production and well.off ahen o te wes he wasat te begin- consumption.Regrettable defensive expenditures are in ning.~~~~~~~~~~~esnsvs Thswe. epast ebte the nature of intermediategoods, costs of production off in the future;when he lives beyondhis income he plans to be worse off. Rememberingthat the practical rather than final product availablefor consumption.To purpose of income is to serve as a guide for prudent correct for havingcounted defensiveexpenditures in NNP, pupse of inom is to srv as.....a gud for prudent theirsize mustbe estimatedand subtractedto arriveat conduct, I think it is fairly clear that this is what the centralmeaning must be. (1946, p' 172). an estimateof maximumsustainable consumption, or true central meaningmust be. (1946, P. 172). income. Thesame basic ideaof incomeholds at the nationallevel. To summarize,let us define the corrected incomecon- Incomeis not a precise theoreticalconcept but rather a cept, "sustainablesocial net nationalproduct" (SSNNP), as practicalguide to the maximumamount that can be con- net nationalproduct (NNP) minus both defensiveexpendi- sumed by a nation withouteventual impoverishment. WVe tures (DE) and depreciationof naturalcapital (DNc). Thus, knowthat we cannot consumethe entire gross national product (GNP) without eventually impoverishing ourselves, so we subtract depreciationand get net nationalproduct This definitionentails no interference whatsoeverwith (NNP),which is usuallytaken as incomein Hick's sense. the current structure of the U.N.System of NationalAc- The central definingcharacteristic of incomeis sustaina- counts (SNA). There is no loss of historicalcontinuity or bility.The term "sustainableincome" ought thereforeto comparability.Two additional accounts 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 approximationof the central and well-established meaning of income and, consequently,of the need for meaningof income.No attempt is made to deal with the correction. controversialissues of national income accounting,such But could we reallyconsume even NNP year after year as inclusionof leisure,disutility of labor, householdpro- without impoverishingourselves? No, we could not, be- duction, and services of long-livedconsumer durables. causethe productionof NNPrequires supporting activities The relationof incometo welfareis not addressed. that are not biophysicallysustainable, and the measure- Since NNP is a familiar concept, it remains only to

8 Towarda Measureof SustainableSocial Net NationalProduct 9 discussbriefly the new accounts:defensive expenditures cost for man-madecapital by analogywith the more self- (DE) and depletionof natural capital (DNC),which are by evidentcase for charginguser cost for natural resources. no meansnovel ideas, but are not yet includedin as part The obviouscategories of natural capital are geological of an extendedSNA. (nonrenewable)and biological (renewable). Both, of course, are depletable.Depletion of geologicalcapital is Defensive Expenditures necessaryfor industrial and agroindustrialproduction. New geologicaldiscoveries do not reverse the process of The explosionof the populationsof human bodies, of depletion,but they do extend the time span over which artifactsof all kinds, and of the populationsof plants and the depletioncan continue. animalsexploited for human use that has happened in Depletionof renewablenatural capitalis in some ways the past fiftyyears might better be called an "implosion," a more serious matter because reduced stocks or popu- since it has occurred in a finite environment.The term lationsof plants and animalswill lead to a reduction in implosionsuggests a compressingtogether rather than an sustainableflow of resource inputs and ecosystemserv- expandingapart, a processof congestion,mutual interfer- ices. Onlyby a future investment(reduction in consump- ence, and self-cancelingcollision. Defensive expenditures tion) could the larger sustainableflow be reestablished, reflect this increasinglyprevalent phenomenon oi mutu- and even that is often not possible.Even in commercially allyinterfering, self-canceling activities. exploited populationsthat are above the level of maxi- The categoryof defensiveexpenditures can be large or mum sustainableyield and therefore would yield more small depending on where the boundaries are drawn. with a smallerstock, the consumptionof the stock dimi- ChristianLeipert of the InternationalInstitute for Envi- nution is not a sustainablesource of income,but rather ronment and Societyin Berlinhas suggestedfive broad capitalconsumption. categoriesof defensiveexpenditures. Geologicaland ecologicalinformation on depletion comesin physicalunits and must be priced or evaluated e Defensiveexpenditures induced by the overexploita- in some waybefore it can be subtractedfrom NNP.This tion of environmentalresources in the general course of 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 willingnessto pay, whicheveris less, in damagecompensation. order to be "conservative."It is not clearthat any greater * Defensiveexpenditures induced by spatial coricentra- arbitrarinesswould be involvedthan already exists in tion, centralizationof production,and associatedurbani- current estimates of depreciationof man-madecapital, zation,such as increasedcommuting costs, housing,and especiallyif one counts obsolescenceor "moral" depreci- recreation costs. ation as well as physical. * Defensiveexpenditures induced by the increasedrisks Income, as Hicks emphasized, is not a theoretically generatedby the maturationof the industrialsystem, such precise concept, but rather a practical guide to prudent as increasedexpenditures for protection against crime, behavior.Surely some reasonable allowance, however im- accident,sabotage, and technicalfailure. precise,for depletionof natural capitaland some correc- * Defensiveexpenditures induced by the negativeside tion for the double countingof defensive(intermediate) effects of car transport, such as traffic accidents with expendituresare required if the income concept is to associatedrepair and medicalexpenses. remain a guide to prudent behaviorby nations, whichis * Defensiveexpenditures arising from unhealthycon- its fundamentalreason to be. The two adjustmentsare in sumptionand behavioralpatterns and frompoor working keepingwith the central idea of income and involveno and living conditions,such as costs generated by drug disruptionof the existingSNA. The need for such adjust- addiction,smoking (both active and passive),and alcohol. mentshas alreadyled independentscholars to begin work on measuringdefensive expenditures and the depletion These categoriesare neither exhaustivenor mutuallyex- ofntrlcpa.Whtemisstogvofcalttu clusiveand are naturallysomewhat arbitrary. Category 1 andnforal cogi. .tio te to j e aimedat might, in our classification,fit better under DNC.But it representsexpendkeepinga start at subtracting the incomeconcept as a reliableguide to prudent representsa start at subtractingexpenditures thlai do not bhvo nawrdta a hne infcnl ic reflectany increasein the net product availablefor con- naion in aounting was firsinitionalize sumptionwithout sumptionwithouteventualimpovershment.nationaleventual impoverishment. income accounting was first institutionalized.

Depletion of Natural Capital Reference

This is entirelyanalogous to the depreciationof man- Hicks,John R. 1946.Value and Capital.2nd ed. Oxford:Ox- made capital.In fact, Keynesjustified the conzeptof user fordUniversity Press. The ProperCalculation of Income from DepletableNatural Resources

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 availablefor consumption. sources.Some would even say that, for these economies, If the revenueaccrues to the publicsector, it can be used nationalaccounting methods produce misleading calcula- just like revenue from any other source, such as the tions. They lead to measurementsthat neither faithfully proceedsfrom income taxes. Given their short perspec- describeeconomic performance ex post, nor can they be tive,the politiciansin charge of such economiesoften do used as a basis for useful policy proposals. For such not want to be remindedthat the revenue derived from economies,current accountingpractices exaggeratein- liquidatingtheir country'snatural assets is neither recur- come, encourage unsustainable levels of consumption, rent nor sustainable.And many a developingcountry and obscure the necessityto implementgreatly needed rejoicesin having its leadershippraised for illusoryrapid policyadjustment. The problemis relevantto practically economic growth, apparentlyhigh rates of saving and all countries where nonrenewableresources are being investment,and deceptivelystable or near-stable price exploitedand where renewableresources are being run levelsbrought about by import surpluses. downwithout being restored. But it is most acute where Such apparentprosperity is bought at the cost of asset such resourcesare being exploitedin the public sector, erosion-a sure recipe for future economicdecline. Thus eitherdirectly or throughforeign interests. natural resourcesare exportedand used up to prop up a In the moreindustrialized countries, where exploitation truly unbalanced, but seeminglycomfortable, external typicallyoccurs in the private sector, tax allowancesfor balance.An overvaluedexchange rate inevitablydevelops, depletion tend to correct the calculationof the "value and relativeprices are upset as a "Dutch Disease"syn- added" believedto be generated by such activities.Such drome sets in, wherebythe prices of nontradablegoods correctionof course is effectedas depreciation,reducing and servicesrise in relationto those of tradables.' Con- the gross product by an elementto coverdepletion. The sequently,the economy'scapacity is reduced to produce correctionis frequentlynot exact, but it is a step in the and exportthe productsof nonnatural-resource-basedac- right direction.This process is being helped by the fact tivitiesthat could providebadly needed employmentand that when properties containing marketable natural re- (sustainable)future income.Any comparativeadvantage sources, such as subsoil deposits,exchange hands, their the countrymay have gets sacrificedduring a period of marketvalue tends to reflect their natural-resourcecon- ephemeralprosperity and illusorygrowth. This is partic- tent. By contrast, no such correctionis made in most of ularlytrue where the 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 higherlevel of consumption. sources, such as mineral extraction or the commercial When the bonanza ends and the natural resource is loggingof forests to make timber and paper. This prob- almost exhausted,standards of living have to fall, and lem, therefore, is one of paramountimportance for the intolerablepressures develop on the external balance. developingworld. Quite often the country finds itself saddled with a high The practice in these countries follows the United externaldebt, whichit contractedin the prosperousyears NationsSystem of NationalAccounts (SNA), which treats when it had overestimatedits capacityto borrow and its

10 The ProperCalculation of Incomefrom DepletableNatural Resources 11 creditors had mistakenlyassumed that the prosperity into a definitionof incomeas that amount whicha person would continue.The governmentthen finds itseliFin an can consumeduring a givenperiod and still be as welloff impossiblesituation in whichthere are no marginsleft to at the end of the period as at the beginning.2 More providea cushionfor urgentlyneeded policy adjustment specifically,we are told in no uncertain terms that: that should havebeen initiatedyears before. The halcyon . .. if a person's receiptsare derived from the exploi- period of plenty willhave come to an end, and all the tation of a wastingasset, liableto give out at a future putativeeconomizing that had been done during those date, we shall say that his receiptsare in excess of his years is seen in retrospectto have been false and futile. income"(Hicks 1946, p. 187). Defectiveaccounting had led economicbehavior and policy analysisastray. Natural resources are certainly "wastingassets" if they The fundamentalprinciple that is flouted by applying are nonrenewable(for example,minerals), or, if they are conventionalnational income accountingto depletable renewable(for example,forests exploited for 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 exploitationto giveout in the future.Ignoring sumption,you are livingbeyond your means, and in doing this elementaryfact makes a mockeryof what has been so you are underminingyour abilityto create future in- passingas economicanalysis and policyprescription for come. The accountingprofession was born, in the late economiesbased on natural resources(and in particular, MiddleAges in the city states of the Mediterraneanbasin, those based on minerals),in which no effort has been largelyto separate from the proceeds accruingto mer- made to compensatefor drainingthe nationalwealth by chants that part which they could use to finance their depleting these resources.Maintaining capital intact is families'current needs. Those merchantshad to guard not a marginalissue. It is central to all economicbehavior againstconsuming their capital,which was the source of and analysis,and it is a poor economistindeed who is their continuedwell-being. From its infancythe account- unableto tell capitalfrom income. ingprofession specifically has addressedthis task. In present-daylanguage the accountantswere asked to define Conceptual Background sustainablelevels of consumption,and they could do so onlyby attemptingto keep capitalintact. The confusionof capital and income,which has been The same principlewas taken up by Adam Smith,who the standardapproach to incomecalculation in this area sawcapital as a means"to increasethe productivepowers and which derives support from the SNA, is becoming of labor" and as an asset whosemaintenance was imper- increasinglyuntenable. 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 which such improvementsre- sources such as forests, which have to be maintained quire." The Wealthof Nations(Smith 1776) 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,ncomprehendsthe whol annuea produ o rates that wouldkeep capitalintact, these activitiescould thilan an laor th nea reeu,wa .ean be charged against the gross returns from the natural free to them after deductingthe expense of maintaining; first, their fixed;and, second,their circulatingcap- resourceto obtain the net value added generated;this is ital; or what, withoutital; or encroaching what, without uponun their capital,c .r , similarioaacunsSilesonloblngtoheam to the way capital consumption is treated in na- 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 icnsum, amuspmendord uoTheir subsiste oo . n offsetby restoration, and the cost of restoration should proportion,iences, andnot amusemn. to theirgross, their butr to theireat neat tooeisei revenue. be charged againstthe gross product of the soil to obtain a true estimateof the net product. The SNA, in failingto distinguishbetween unsustainable 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, produced by the factors of produc- result the value added that appears to be generatedcon- tion, disregards the fundamental Smithian concept of tains capital elements that should be removed.In this "neat revenue,"which shouldguide the consumptionand case those who estimatenational income should impute a assessmentof the wealthof the revenuerecipienlt. capitalconsumption charge based on technicallyaccept- The distinction between capital and income has re- able criteria against current receipts to obtain the true mainedcrucial throughoutthe developmentof econom- incomefrom these activities.For soil erosion,some esti- ics. In the present day, Hicks paraphrasedthis principle mate may be necessaryof the decliningpower of the soil 12 Salah El Serafy to produce, and this can be based, for example,on de- quenceof acceleratingthe liquidationof subsoilassets is cliningland yieldsover time. This chapter, however,ad- applauded as good economic performance and is con- dresses onlythe problemof estimatingincome generated fused with the growth that comes from labor, capital from depletable,nonrenewable resources. formation,technological progress, and efficientorganiza- My thinking on this topic began to be shaped by a tion. The revenueaccruing to countriesthat depletetheir sense of discomfortover what I thought to be an inappro- natural resources in this way is reflected in increased priate use of economic concepts when the pricing of savingrates and investmentcoefficients and in improved petroleumbegan to attract the attention of economistsin parameters, such as incremental capital-outputratios the early 1970s. To my mind the oil market had long (ICORS),which shed deceptivelyfavorable light on the been an oligopsonisticmarket, dominated by powerful economicperformance of such economies.Policy advice multinationalconglomerates. Economic analysis had con- basedon these calculationsbecomes dulled at best-and tributed little to understanding how prices were deter- downrightwrong at worst. minedin that sort of market,beyond the traditionalmod- The conceptof rent in this situation is profoundlymis- els of oligopoly theory, which concentrated on how used and totally misapplied.In the perception of the equilibriumwas reached rather than on the levelof prices classicaleconomists the rent that qualifiedas valueadded producedby it. Later, when oligopsonyin the petroleum derivedfrom the indestructiblepowers of nature.5 Such marketgave way to an apparent monopolyallegedly insti- revenueis clearlysustainable where the powers of nature tuted by the Organizationof PetroleumExporting Coun- to reproduce it are not impaired, and it can therefore tries (OPEC), the price increaseswere too facilelyattrib- legitimatelybe counted as income. The surplus, net of uted to the powersof the exporters' cartel. extraction costs, emanatingfrom liquidatingnatural re- It was curious that many analysts overestimatedthe sources, however,has little kinship with either rent or competitionprevailing in that market before 1973 and quasi-rentas defined by Marshall(1920). underestimatedit afterward,emphasizing OPEC'S monop- There seemsto be no alternativeto bringingthe capital olypower. It waseven more curiousthat manyanalysts in nature of such exploitationinto the open and integrating the 1970sappeared to think that if free competitionwere this in all economicthinking and measurements,not just to prevail,competitive equilibrium would indicate a price to gauge welfareadequately, but to savethe disciplineof equal to the marginalcost of extraction,which was-and economicsfrom disrepute.Even noneconomistshave on still often is-referred to as production,and that it was occasionrightly perceivedthat mineral extraction reve- only because of the alleged cartelizationof supply that nues are not whollycurrent income.A small and under- the price wasable to rise abovethat cost.3 developedcountry such as Libyacould thus legislateas This constructionwas later challengedby those who early as 1963 (whenit first began to extract petroleumin were aware that the price of an irreplaceablenatural commercialquantities) 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,representing the erosionof perceptionwas strong in that verypoor countrythat this the resource.Even under free competition,the marginal unique wealth truly belongedto future generationsand cost of extractioncould not possiblyindicate an 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'sstandard definition, current income is that part of mine the valueof the veryasset being sold.Hotelling had receiptswhich, if devoted to consumption,would leave to be resurrected and used with great dexterityby an the earner no worse off at the end of the accounting important economistlike Solowfor a more convincing period than at its beginning. explanationof petroleumprice increasesbefore the economic professioncould be persuaded.4 But it has not Weakness of the Depreciation Approach been completelypersuaded, and doubters still abound. Parallelto the microeconomicconfusion about the pric- Likeother economistsof the same bent, I thought first ing of natural resources, other inaccuracieshave also of using the "capital consumption"or "depreciation"ap- been perpetratedand have distorted 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 pletable natural resources is significant.If the marginal extractionduring the year, the amount of depletion,val- cost of extraction was the only cost, then any surplus ued at current prices, can be deducted from the gross accruing to the sellers was pure rent and represented proceeds,just as, for example,the depreciationof capital valueadded to be includedin the gross domesticproduct equipmentused for manufacturingis subtractedfrom the (GDP). This certainlyis impliedby the accountingprac- gross value added by manufacturingactivities. The min- tices currentlybeing used underthe SNA. Based on these eral extraction earnings can still be reckoned in GDP, practices,the expansionof economicactivity as a conse- providedthat the value ofthe depletionis deducted from The ProperCalculation of Incomefrom DepletableNatural Resources 13 it for calculatingnet income.The problem of the exact zero-a measurementthat is not particularlyedifying. For valuationof capital consumptionin this case appearsto the gross product this approach would not make any be of secondaryimportance. Much more impcrtant is to adjustmentand would simplyeliminate the net product try to make some adjustment.Various methods are al- altogether. Such a measurementof net income would ready used to treat inventoriesand other capital assets belie the observablefact that havingsubsoil mineral de- used up in the process of production.Shortcuts, approx- posits to exploitgives their possessorsan income edge imations,and arbitraryestimations are used throughout over thosewho do not have that 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 moved away from this ap- Mineraldeposits and other comparablemarketable nat- proach, both for practicalas wellas conceptualconsider- ural resourcesare assets. Salesof assets do not generate ations. First the conceptual.It is wrongto describe as value added and should not be includedin GoP. They do current productionthat which is not current production. vate addedand howeve ich inbe Tto GDP is an important measurementand is much more in generateliquid funds, however, which can be put to alter- use than NDP (net domesticproduct). Even if NDP and its native uses. A countrymay chooseto spend the proceeds national parallel NNP are correctlymeasured, the whole (net of extraction costs) 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. From an accountingpoint of view,however, an lated if revenuesfrom depletableresources are 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 preferredquantity for 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 crucial macroeconomicratios, with the nominatorbeing so that the interest on it will make up for the eventual moneysupply, exports, imports, external debt, debt serv- failure of receipts from the wasting asset in the future. ice, savings,capital formation, and so forth.As Hickshas This proposition,which can be found in Hicks (1946 suggested,the conceptof net incomeis usuallyeschewed chapter 14), suggestedthe need to convert the mineral because it is alwaysarbitrary. It relies on estimates of asset concerned into a perpetual income stream. The depreciationand inventoryuse that are a miixedbag of finiteseries of earningsfrom the sale of the resource,say hlistoricalcosts 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 rationtaxlawss, andallowasjcves, van suratoncebcom- infinite series of true income, such that the capitalized pany practices, as well as subjectivevaluation by eco- valuesof the two series are equal. From the annual earn- nomic agents who do the reckoning and wvhohave a insfosae,nicmepronttcnbepntn variety of expectationsabout the future (Hlicks1981, ings from sales, an incomeportion that can be spent on chap. 9). If an incomecorrection is to be made,it should consumptionshould 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 perpetual stream of incomethat would Another reason why I discarded the depreciation ap- providethe same level of true income,both during the proach to rectifyingincome accounting for depletable life of the resourceas well as after the resourcehas been resource activitiesis 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 advantageshould be true incometo total receiptsis: reflectedin calculatingthe incomeof both groups. If we 1 deduct from the gross receiptsfrom mineralsales in any XIR = 1 - ____r_n_ one year an amountequal to the depletionalong the 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--an extreme 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 multipliereffect of ancillaryactivities related should be set aside as a capital investmentand totally to extractionas well as the contributionof other sectors excludedfrom GDP. On the expenditureside, this deple- to valueadded) wouldgive us a GDP of 100 and a NDP of tion factor would represent a disinvestmentthat should 14 Salah El Serafy be set against capital formationin new assets, so that Figure 3-1. Income Contentof MineralSales at Various total expenditurewould still be equal to the true income. Life Expectanciesand DiscountRates If all of the receiptswere devoted to consumptionand if new capitalformation fell short of the depletion factor, the accounts should show a negative value for capital 1.0 r = 10 percent formation,thus reflectingthe disinvestmentthat had oc- curredin the accountingperiod. The ratioXIR dependsonly on two values:the reserves- to-extractionratio, that is, the life expectancyof the re- sourcemeasured in years,and the discountrate. A country 3 percent that liquidatesits mineralreserves over fifty years needs to 0.8/ set asidefor reinvestmenta smallerportion of its receipts r = 2 percent than anotherthat liquidatesits reservesover twenty years, and thus it can count a larger portion of its receiptsas r4I income.Similarly, if the receiptsset aside can be invested at a higherinterest rate, say 10 percent,a higherportion II wouldbe reckonedto incomethan if the interest was 5 percent.According to this formula,with a discountrate of ' 1 5 percent, a countrythat liquidatesits natural resource r = 1 percent overten years can consideras incomeonly 42 percentof E its annual receipts,while another witha fifty-yearhorizon can reckon as muchas 92 percentof its annualreceipts to 0.4 currentincome. At a 10 percentdiscount rate the former's I current incomewould be 65 percent of the receiptsand 1l the latter's 99 percent, which would require almost no / correctionto GDP estimatesas currentlymade. Figure 3-1 shows the ratio XIR (the portion of total receipts that is true income) as a function of the life 0.2 expectancyof the resource,N, measuredin years, at ten alternativediscount rates, decreasingfrom 10 to 1 percent. The same relation is given in Tables3-1 and 3-2. Table3-1 showsthe income content of mineral sales at eleven alternative discount rates from 0 to 10, for re- 0...,.l.,.l.,.l.,.Il.,.l...,i.l.,.l.,.l source life 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 of resourcein years) 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, expressed 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 element that, I believe,should practicesfor calculatingGDP accordingto the injunctions be excludedfrom GDP as a depletionfactor. of the SNA are thus seen to be built on one of two The calculations show that the present practice of untenable premisesor a combinationof both: that the counting mineral sales proceeds as current income im- natural resource being liquidatedwould last foreverand plies that the fraction that the welfareof futuregenerations does 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 followingpoints should XIR = 1. This would be obtained, irrespectiveof the be clarifiedand emphasized. discountrate, by havingn = oo;or alternatively,where n is finite, by havinga veryhigh value of 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 different from the arbitrary esti- ownersand is tantamountto setting a very lowvalue on mation methods used extensivelyunder 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 Salah El Serafy of 5 percent or thereaboutscan be chosenas approximat- verywell keep the reserves-to-extractionratio unchanged ing what the classicaleconomists used to call a natural by raisinghis annualextraction when he realizesthat the rate of time preference.This could be changed periodi- reservesare larger than he had thought. This will also cally,say everyfive years, guided by changesin the long- translateinto higher income. term marketrates. * It is not necessaryto estimatethe absolutevalue of * Underthe proposedformula, the settingaside of part the total mineralreserves or to resort to what is known of the proceedsfor reinvestmentis only a metaphor.The as "wealthaccounting." Neither is 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,which the accountanthas to relate to the accountingshould conveythis fundamentalmessage. size of the total reservesin order to estimateincome. By * Equallymetaphorical is the process of calculating implication,it is assumedthat the unit value of the total the yie!dsfrom investing the set-asidepart of the proceeds resourceis the same as the current price. Such valuation, at the choseninterest rate. As stated previously,the rate appearingin both the numeratorand denominatorof the should approximatean availablemarket parameter that formulagiven earlier, cancels out, and what remains is wouldindicate prudent behaviorfor the asset liquidator the ratio betweentwo physicalquantities: the size of the and wouldguide his decisionsabout extraction.Thus he reservesand the annual extraction,that is, the number of may decideto delayextraction if the market interestrate, yearsremaining before the resourceis exhausted.Specu- availablefor financialinvestment, appears lowerthan the lation about the ftuturecourse of prices, however,does rate at which his 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- physicalor financialassets at that interest rate. However, countant'sproblem. he wouldbe wiseto seek such a rate as a minimumyield * The problems of the terms of trade or of changed on his new investments.The so-called Hotelling Rule technologythat mightlead to drasticchanges in the valu- states that if he left his natural resource alone, it would ation ofthe resourceare not addressedhere. Such changes appreciateat the market discount rate because of its haveto be acknowledgedby the incomeaccountants when growingscarcity. they occur.The focus of this approach is on the volume * Likewise,the extractionschedule, assumed to be at of extractionin the accountingperiod as it relates to the a constant rate over some time horizon, is also a para- total volume of 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.Every period he may decide to alter his to assessthe activity'scontribution to GDP. plans, dependingon current prices and the expectations * The proposed method could be applied immediately thereof,by increasingor decreasingthe annualextraction to mineral depositsthat are more or less ascertainable, rate. He is at liberty to do so. All the formulaneeds is such as petroleum,for whichthe industryestimates proven the ratio between the total reservesand the amount ex- reservesand publishesthese estimatesregularly. 7 But even tracted in the current period. Supposean owner,who had for petroleum,and certainlyfor metals, owners tend to been planningto liquidatehis reservesover a ten-year mine richer and more accessibledeposits first, which period, decides to accelerate extraction because of an means that later extractionsinvolve progressively higher expecteddecline in future prices (reckoningthat, since extraction costs. Rising extraction costs can undermine his market share is small, he can do this with impunity, the sustainabilityof the activityas much as the physical that is, withoutdepressing prices) and now decideson a exhaustionof the resource.When market prices fall be- five-yearhorizon. All that is necessaryis to use the new lowextraction costs, manyprevious sellers, still sitting on ratio of reservesto extraction, and this can be decided large deposits,find profitableoperation impossible.Esti- period by periodand changedevery year if need be. mation of the volume of reserves therefore should be * The same appliesto the discoveryof new deposits- adjusted downward by a factor that would reflect the or a downwardadjustment in reserves-usuallya tough risingfuture cost of extraction.Shortcuts for such adjust- nut to crack. The new discoverydoes not have to be ment need to be devisedcase by case. counted as income,as some have suggested.All that is * It is important to remember that the issue here is necessary,if this approach is followed,is to alter the nationalincome accounting. Even if the identifiedglobal reserves-to-extractionratio (A)in the calculations,ihat is, reserves of a mineral get adjusted upward, the fact re- if it is decidedto keep the extractionschedule as before. mainsthat the reservesof individualcountries inevitably In this case, the discoverywill reflect itself in higher are depleted as they are exploited.National income ac- income than before, as shown by movingfrom left to countingshould reflect this individualnational aspect of right on the x-axisin Figure3-1. However,the ownermay the activity. The ProperCalculation of Income from DepletableNatural Resources 17

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 SNAfor 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 practices 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 - of the SNAat the GDPlevel. It is not enough to record (1 + r)n+1 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 thiifmionit 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 resource, 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 accumulatedinvestment would continue to yieldthe same levelato incomes t d 1. The term "DutchDisease" originated in the 1960sto refer leveltofisnecoessar X. idntfyXR,thtis te rpotin to the adverseeffects on Dutch manufacturingof natural gas t is necessary to identify XIR, that is, the. proportion discoveries.Generally speaking, increased revenues from a nat- of net receipts that can truly be called income, and its ural resource encourages spending on nontraded goods and complement 1 - XIR, the capital element, also as a drawsresources out of the traded, nonnatural resource sector, proportion of net receipts. The capitalized value at inter- thus stiflingdiversification and retardingdevelopment of non- est rate r of the finite series of receipts R should equal natural resourceexports. 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 Definitionof Income,Saving and Investment,"and but this should not inhibit approximationsthat can be later that chapter's"Appendix on User Cost." revised.In the words of the late Sir Dennis Robertson,"it is 3. OPEC admittedlymet regularlyto agree on the prices at better to be approximatelyright than preciselywrong!" whichits memberswould sell oil. But such prices cleared the marketwithout any quotasimposed to regulatesupply. Not until References 1982, however,did OPEC behave like a cartel, with individual quotasindicated for its members,but like all cartelsthis attempt Corden, W. M. 1984. "BoomingSector and Dutch Disease to maintainprices in a decliningmarket palpably failed. Economics:Survey and Consolidation."Oxford Economic 4. See Solow(1974), in whichhe recalledHotelling's path- Papers36:359-80. breaking article, "The Economicsof ExhaustibleResources," El Serafy,Salah. 1979. "The Oil Price Revolutionof 1973-74." Journalof PoliticalEconomy 39 (April1931):137-75. Journalof Energyand Development4(2, Spring):273-90. 5. "[T]heoriginal and indestructiblepowers of the soil" as 1 formulatedby Ricardo(1821). . 1981. "AbsorptiveCapacity, the Demandfor Revenue, 6. 1 had been thinkingalong these lines for some time and and the Supplyof Petroleum."Journal of Energy and 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 UniversityPress. estimatingincome from depletablenatural resourcesin a later . 1981. Wealthand Welfare:Collected Essays on Eco- paper on absorptivecapacity, presented in 1980 to an energy nomic Theory.Cambridge, Mass.: Harvard UniversityPress. conferenceorganized by the Universityof Colorado.The con- Keynes,John Maynard.1936. The GeneralTheory of Employ- cern at the time wasthat the so-called"capital surplus" econo- ment, Interest,and Money. 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. throughincreased imports, restore equilibrium to the petroleum donMacil. buyers'balances of payments.I attackedthis approachbecause Ricardo,David. 1821. On the Principlesof PoliticalEconomy it reflectedthe short-terminterests of petroleumconsumers and and Taxation.3rd ed. London:John Murray. not that of the ownersof this scarce resource and of humanity Smith,Adam. 1937. An InquiryInto the Nature and Causesof at large. See El Serafy (1981). An appendix to that paper the WealthofNations, 1776.Cannan Edition.New York: The entitled, "HowMuch of PetroleumReceipts Can Be Reckoned ModernLibrary. to Income?"proposed the formulashown in the appendixto Solow,Robert M. 1974. "The Economicsof Resourcesor the this chapter. Resourcesof Economics."American Economic Review 64(2, 7. Occasionallyestimating reserves would raise controversy, May):1-14. ______4

IntroducingNatural Capital into the SNA

Anne Harrison

Duringthe past ten to fifteen years public reaction to the "desirables"that the SNA omits and excludes the environmentalissues has broadened from a concern for "undesirables"that the SNA includes. preservingendangered wildlife and aestheticallypleasing Such alternativestatistical systems could form satellite landscapesto the realizationthat the whole process of accountsto be used in conjunctionwith the revisedSNA. economicdevelopment depends on 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 economicsurvival of millionsof and inclusionof others, no conflict should arise. How- people dependscritically on the managementof both the ever,given the claimof the SNA to providea comprehen- quantityand qualityof land and waterresources. sive frameworkunder which all such satellite accounts When environmentaleconomists wish tc demonstrate can be developed,it is important to establish an appro- their concern in quantitativeterms and to illustratethe priate interfacewith environmental matters in the process effectof alternativescenarios, they find the present Sys- of reviewingthe SNA. tem of NationalAccounts (sNA) (UnitedNal:ions 1968) to From an environmentalperspective, neither exhausti- be inadequatefor a number of reasons.The problemsare ble resources such as mineral deposits nor permanent both of omission and commission.On the one hand, resourcessuch as land and water should be treated as manyactivities undertaken by womenin developingcoun- freegifts of nature. Althoughland and water seem at first tries, such as findingand carryingwater amd fuelwood, to be free, these resources are not automaticallyself- are excludedfrom the present measuresof 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. rehabilitatepolluted rivers or otherwiserestore degraded Economicactivity necessarily interacts with nature, and environmentalresources are included in GDP, and in- allowancemust be made for the existenceof environmen- creasesin this type of activitylead to increasesin GDP. tal programs,which husband and maintainthese penna- Steps to redress some of these shortcomingsare in nent resources,and for the lack of such programs,which hand. Variousspecialized statistical systemshave been, leads to the destructionof natural resources. or are being, developedto address questionsin specific The presenceor absenceof such programsis therefore areas, and the environmentis no exception.Physical re- an economicdecision that directly affects the potential source accountsare being developedto show,in volume economicactivity in subsequentperiods, just as a deci- terms, inputsand outputsof physicalprocesses, including sion on the rate of depletion of nonrenewableresources natural resourcesas well as manufactured'products. The does. In both cases, therefore, there is a strict parallel "Frameworkfor the Developmentof EnvironmentalSta- with the decisionto create and maintainman-made capi- tistics" (UnitedNations 1984), for example,attempts to tal, and environmentalistsargue that the SNA should rec- showthe interactionamong environmental, economic, and ord these resources as alternativeforms of capital.The social statistics. Various proposals have beern,and are question,therefore, is how muchpresent practicesunder being, examinedto develop an 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. value of the reserveswould be givenas zero. Morecomplicated alternative valuations for mineralex- traction have been proposed. For example, El Serafy Exploitable Resources (Chapter3) suggestsdetermining an income streamwith the use of a discountedcash flow analysisof expected Muchof the past discussionby resourceeconomists has earningsfrom the depositover its expectedlifetime. concernedthe treatmentof nonrenewableresources, such as mineraldeposits. In fact, similararguments also apply Permanent Resources to natural forests used for timber and to natural fish stocks. Since both of these are renewable,even if not Anothertype of expenditureof concern to environmen- actuallyrenewed on a realistictime scale, it is convenient talists is related to the preservationof land, water, and. to considerall three cases as exploitableresources. clear air. This is generallydescribed as defensiveexpen- In the production accounts of the present SNA, when diture, althoughfurther categorizationis instructive,and an exploitableresource such as oil is extractedand sold, incomeas wellas expenditureneeds to be considered.In onlythe directcosts associatedwith its 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 differenceis treated as gross operatingsur- sources. plus. Net operating surplus differsfrom this only to the Before consideringhow to deal with issues related to extent that fixed man-made capital is consumed. Al- permanentresources, it is helpfulto reviewthe SNA guide- though the process of oil extractionis treated as produc- lines on the treatmentof man-madecapital. Two typesof tion, neither the value of newlydiscovered reserves nor expendituresassociated with capital occur on a yearly changes in the value of reservesbecause of changes in basis. The first is the consumptionof fixedcapital (depre- worldprices is treated as production. ciation),which is an allowanceto permit the replacement This results in the rather anomalouspresentation of of the capital asset at the end of its useful life. Over the infdrmationabout stocks. The value of the unexploited economyas a wholethe valueof the consumptionof fixed oil at the start of the year appears in a balancesheet for capitalin a year is the value of all man-madeassets that the industryand the nation, as do the start-of-yearvalues were used up in that year and that have to be replacedif of man-madecapital assets, but, since all changesto the the level of man-madecapital stock at the start of the valueof exploitableresources between the start and end year is to be kept intact.The second is the currentexpen- of the year are explained in the reconciliationaccount, diture necessaryto repair and maintainthe capitalstock. this occurrencein the balance sheet is like a memoran- The SNA distinguishesbetween current and capital re- dum item. If exploitableresources were treated as natural pairs: "expenditureson current repair and maintenance capital, part of what is now treated as gross operating make good breakages in fixed assets and keep them in surplus in the productionaccount wouldappear as con- proper workingorder, whileoutlays on capital repair and sumption of natural capital, and net operating surplus alterationlengthen the expectednormal lifetime of use ol would be decreasedby this amount. A matching entry 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 exploitableresource before its exploitation. the life of an asset, the lack of maintenancemay shorten Daly(Chapter 2) 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 (calculatedperhaps as a standard markup on the direct between the levels of current maintenance and capital costs) should also be deducted from the value of the oil consumption.Indeed, for a specificgroup of assets, in- at the wellheadand that the residualwould represent the cludingroads and dams, the SNA states: "it may be con- subsoilvalue. This straightforwardapproach has the ap- sideredthat expenditureson repairs and maintenanceare peal of simplicityand economicsense. Variationsin world sufficientto maintainthe asset in its originalcondition" priceswould lead to matchingvariations in subsoilvalues (para. 7.20); this is consideredas justificationfor making and would determine when a deposit was commercially no provisionfor consumptionof these fixed assets. This viable and when not; the latter being when the subsoil provisionhas alreadybeen questionedin the SNA revision valuefell to zero or below.In certain circumstancesex- process, and it is likely to be changed in the new SNA ploitationmight continue evenif this valuewere negative, manual.' for example,because the directcosts couldnot be averted. In severalpoorer developingcountries, for example,the In such a case, the entrepreneurialreturn wouldhave to retrenchmentof governmentexpenditure has led to the IntroducingNatural Capital into 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 economicactivity regardless of desirability involvecapital expenditure that wouldnot have occurred 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 alternativepresented here-that when preven- 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-backbasis, it is intermediateexpendi- not yet discussedin detail, the appropriatevalue of the ture-is oversimplifiedand misleading.The preventive capitalconsumption would seem to be that of the "miss- expenditureconsists of the purchaseof labor and of goods ing" maintenance. and services,which in turn have labor input. Therefore Howdo these practicalitiescarry over to the proposal initiatinga preventiveexpenditure program does increase to treat naturalresources as capitalassets? Expenditures the value added,and thus GDP, even if it is first recorded associatedwith permanent resources can be of two rein the accountsas intermediateexpenditure. Indeed, the lated, but rather different,types. The first are expendi- fact that increasingpollution prevention would increase tures intended to prevent the degradationof natural re- employmentopportunities is often cited by environmen- sources,and the second are to redress degradationthat talistsas an argumentfor initiatingsuch programs.Under has alreadyoccurred. Preventive expenditure clearly par- the present SNA, all alternativeslead to the conclusion allelscurrent maintenanceand, in particular,the current that initiatinga pollutionprevention campaign, however maintenanceof roads. If all industriesensure that land, funded,increases GDP. 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 preventiveexpenditures may be made in dation of those natural assets is treated as capital con- one of three ways:by industryitself (either voluntarilyor sumptionand shouldbe includedin GDP. This treatment in response to governmentlegislation), by government would exactlyparallel the present situation of the treat- and funded by taxes leviedon industryaccording to its ment of roads describedabove. The newSNA proposalis pollutionpotential, or by governmentand fundedby gen- that GDP should include either the cost of maintaining eral revenue.In the first case, expendituresby industry roads in their original conditionor the consumptionof to prevent pollutionwould be classifiedas intermediate man-madecapital of the same amount. This recognizes expenditures.In the second case, since the paymentto that the present practice, in which there is no mainte- governmentis related to the serviceprovided, this activity nance, leads to GDP being understatedby the amount of of governmentshould be treated as a public enterprise. this missingcapital consumption.For the environment, Paymentsto governmentshould not be treated as taxes, therefore,it is proposedthat if preventiveexpenditure is but as fees for services,and thus shouldalso be classified incurredand no pollutionresults, GDP is correctlymeas- as intermediateinputs. (Governmentprovision of waste ured. But if such programsare neededbecause pollution disposalservices to industryis alreadytrealted as a public is increasing,but they are not being initiated,then GDP is enterprise in some countries.) In the third case, when underestimatedby the cost of the programs. A simple governmentfunds pollutioncontrol out of general reve- numericalexample of the alternativesis given in Table nue, this appears as a final expenditure. 4-1. Thisillustrates the case in whicha countryat present Someresource economistsargue that all such preven- has a GDP of 100 with consumptionof man-madecapital tive expenditureshould be excludedfrom GDPand thereof 10. The effectof environmentaldegradation is 5, which fore wishto categorizeeven government-funded programs as intermediateexpenditure, but this proposalis inconsis- tent with accountingdefinitions. The distinctionbetween Table4-1. Effecton GDPof Introducing intermediate and final expenditure is determined by an EnvironmentalProtection Program whetherthe product is resoldto another ec:onomicagent, aPreent SNA Proposedrevision not by the nature of the product. For welfareor other Without With Without With analyses,specific activities may be excludedbecause of program program program program their nature. In addition to environmentalprotection GDP 100 105 105 105 costs, such candidatesas defenseexpenditures and crime Consumptionof and drug "industries"have been put forwardfor exclu- man-madecapital 10 10 10 10 sion. The derivationof an alternative measure of a re- Consumptionof stricted set of activitiesby deductingfrom (and possibly naturalcapital - - 5 0 addingto) those includedin GDPusing normativecriteria NDP 90 95 90 95 is a legitimateand arguablydesirable development. But it - Not applicable. 22 Anne Harrison is exactlyredressed by introducingan environmentalpro- levelbased on differentlifetime assumptions for different tectionprogram. types of assets in different industries.For the consump- This highlysimplified example highlightsthe conse- tion of natural capitalsuch an approachis neither possi- quencesof the proposedtreatment and of preservingthe ble nor appropriate.Industry is not the only degrader of existingposition on natural capital.Net productmeasures the environment,and it may be impossibleto attribute are the same in both systems,which showsthat the intro- the degradationto individualindustries. ductionof an environmentalprotection program leads to Consider,for example,the case of three factories, all an increase in NDP. Under the present SNA there is an dischargingeffluent into 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 different effluents increasingthe present valuationof GDP without the pro- causedthe problem.In such casesattribution of the cause gram to allowfor the consumptionof natural capital. of the pollutionamong the three factorieswould be diffi- At first it may seem counterintuitivethat the degrada- cult and not especiallyinstructive. Degradation may also tion of permanentresources leads to an increasein GDP. be caused by final consumers,for example,by the car This reflects the common lack of awarenessthat the exhaust of householdsor government.It may also occur "gross"in GDP means "before allowancehas been made not as a result of activitywithin the country,but as an for consumptionof capital." Common usage overlooks involuntaryimport from a neighboringone. For all these this part of the definitionor assumesthat the allowance reasons, therefore,it seems appropriatethat a single ad- for depreciationis fairlyconstant overtime, so gross and justment in money terms to the SNA definitionof gross net product measuresmove in line with one another, and productmeasures would be adequate. This might be seen gross can be used as a proxy for net without undue as analogousto the adjustmentfor imputedbanking serv- distortion. This assumptionhas proved misleadingfor ices, which is made in total only and not attributed to manypoorer countrieswhere new capitalis not acquired individualindustries. as fast as the old is exhausted.In environmentalterms For the national accountsfor a year, it is the changes the assumptionis equivalentto assumingthat the environ- during that year in the environmentalendowments that ment is not degraded,and it is the obviousrefutation of need to be captured,not the deviationfrom an absolute this that is the originof the present concern.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 clearlyexplained to facilitatebetter- mated. Althoughthe measurementand valuationof the informedand more appropriatecommentary and analysis. consumptionof natural capital may have to be approxi- An importantuse of GDP is for comparisonsover time mated and simplified,these inexactitudesmay be no less or betweencountries. Although there may be reluctance tolerablethan those alreadyencountered in such areas as to increasepast estimates of 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,countries introducing environ- intangibleassets. mental protectionprograms will show increasesin both GDP and NDP. The worse the environmentaldegradation Environmental Enhancement Programs that is being reversed,the greater this increasewill be. Underthe proposalabove, only NDP willincrease, and the In this discussionit has been assumed that there is a gap betweengross and net product willnarrow, in accor- prima facie case for includingadjustments for the con- dance with both the economicand accountinginterpre- sumptionof natural capital in all countries,although for tation of gross and net. The entries for this capital con- some countrieswhere no environmentaldegradation oc- sumptionas well as for man-madecapital would also be curs the appropriateadjustment may be zero. Another includedin the balancesheet and wouldshow the cumu- factor to consider,although it may apply irregularlyand lativeeffect on the resources availableto the nation of to only a few countries,is how to treat major programs continuedenvironmental degradation or of its restitution. to reverse the degradation that 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 principlewhy they should not be fundedby industryor by private nonprofitinstitu- Assumingthat the theoretical proposal above is actions. Whoeverundertakes the expenditure, it clearly cepted, there remains the question of how consumption wouldenhance the natural resourcesand would increase of natural capital should be measured. Consumptionof the availabilityof such assets in the future. This under- man-madecapital, although not without its own difficul- lines the case for treating the assets as capital and the ties of measurement,can be calculatedat a disaggregated expenditureas capitalexpenditure. Introducing Natural Capital into the SNA 23

Treatingenvironmental enhancement programs as cap- ernmentprograms, even if treated as currentexpenditure, ital expenditureis a logical consequenceof introducing will at present lead to increasesin GDP but willnot be the consumptionof natural capital as an adjustmentbe- separatelyidentifiable. The proposal being made here is tweengross and net product measures,since they are in that majorenvironmental rehabilitation programs should effectnegative capital consumption. It was argued above be classifiedas capitalexpenditure and identifiedas en- that the measurement of natural capital consumption hancementof natural resources,regardless of who funds should be based on annual changesin qualityindexes of them. In supplementaryanalyses a more limitedclass of environmentalendowments. If such an index showsan capitalexpenditure, including only "productive"capital, improvementover the year, the value of natural capital howeverdefined, may be used, parallelingthe derivation consumptionfor that resource is zero, but the value of of the more restricted measuresof "desirable"activities the improvement,which is by our definitionthe value of describedin the discussionof preventiveexpenditure. the enhancementprogram, should enter the azcountsas the same broad type of expenditure,that is, as capital Unplanned Occurrences rather than current. Some misattributionof capital expenditure may go undetected if the program does not The sections above dealt with current and capital ex- make a positiveimprovement but only mitigal:esthe de- penditures in relation to the environmentand in the gree ofdegradation in the environment.If the data sources contextof planned activities.The environmentand sub- were rich enough, adjustmentsfor these situationscould sequent economicactivity, however, are also greatly af- be made, and separate adjustmentscould be made for fected by a natural disaster,such as an earthquake,or a differenttypes of naturalresources. Since the proposal is man-madedisaster, such as a major chemical spillage. to adjust for the consumptionof, and enhancementsto, The proposalsdescribed above could encompassthe ef- natural resourcesat the nationallevel, however, aggrega- fect of such unplanned occurrences.A disaster would tion of the effectsacross projectsand resourcetypes will cause consumptionof natural capitalto increaseand net still ensure consistencyin the flowaccounts and balance product measuresto fall.This wouldbe offsetin part by sheets at the nationallevel. any significantexpenditure to restore the situation,which It may be argued that natural resources are not in wouldcount as enhancementof natural capitalfrom what themselveseconomically productive assets and therefore it wasafter the disaster.The same is true of the effecton that expenditureto enhance them should not be treated naturalresources in one countryof degradation(planned as capital. However,not all items included in gross do- or unplanned)originating in another country. mesticfixed capital formation (GDFCF) in the present SNA are economicallyproductive. Schools and universities Sustainability and the SNA produce better educated people, but they will be more productiveonly if employmentopportunities exist that Apartfrom the intrinsicinformation to be containedin utilizethe extra educationgained. It is not unknownfor environmentalaccounts, there are two further benefits such institutionssimply to increasethe number of edu- that this initiativehas brought to national accounting. cated unemployed,although the GDFCF is not decreased The first has been to focus attention on the difference to reflect this. Nor shouldit be. Schoolsand universities betweennet and grossproduct measures, since evenwhen are means of improvingthe human capital stock. The the distinctionrelates only to man-madecapital, there are deploymentof that capitalis a separateissue. Someman- numerousoccasions when nationalincome on a net basis made capital assets are purely defensive,such as the wouldbe a more appropriateindicator than the ubiqui- Thames barrage, a mechanicalbarrier across the River tous GDP. The other benefit is more diffusebut arguably Thamesto hold back waterduring high tide and adverse more important in the longer term. The present SNA has windsto preventLondon from beingflooded. Somne serve depersonalizedeconomics by concentrating on produc- obviouslynoneconomic functions, such as a new cathe- tion processesand associatedtechnologies. Environmen- dral or a spy satellite.The range of assetsto be included talistshave brought attention back to the questionof how in GDFCF in the new SNA is due to be reviewed,and a peoplelive and the qualityof life,which is associatedwith distinctionin classificationbetween productive and non- an understandingthat respect for life is intimatelyand productiveassets might be very desirable.But even on inevitablybound up with respect for the environment.In present groundsa case can be made to treat majorenvi- statisticalterms this gives a new opportunityto bridge ronmentalenhancement programs as capitalformation. the present separationbetween economic and 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 human developmentthrough the 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 frameworkfor definingsustainable development. 24 Anne Harrison

Environmentaleconomists are still workingto agree on ural capital.Such measurescould also be appliedin areas a definitionof sustainableincome. But central to it is the of human capitalby 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 worseoff at 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 covers not just income but also an element of ning, periods longer than a year might be used; in other wealth. cases assets per head of populationmight be the basis of The present SNA 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 identical in value. It may be possibleto detennine factors that can be calculatedeasily and withoutambigu- measures of sustainableincome and sustainableoutput ity form a bridgebetween the main SNA and the satellite that are equal in the aggregatebut not in their disaggre- environmentalaccounts, they wouldhighlight directly the gated parts. For example,if incomefrom a miningactivity differencein valueand interpretationof measuresof gross is used to fund alternativeproductive activity when the and net product. Provisionof, and reference to, a set of mineralresources are 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 nationalaccounts and raise discus- are. But there is no necessityfor the income in a later sion in the popular mediato a more informedplane. This period to be at exactlythe same levelas in the previous consequencewould benefit both nationalaccountants and period. Which levelof incomeis to be used as the basis environmentalistsand wouldbe an importantstep on the of sustainableincome? Is it the sustainabilityof income road to the introductionand acceptanceof more elabo- or incomeper head that is of interest?Is sustainabilityan rate conceptsof sustainableincome and product. absoluteor a relativeconcept? The answerto these questionsmust depend in part on Summary of Recommendations the needs of analysts.It may well varyfrom one application to another and may depend on assumptionsabout If satelliteaccounts for the environmentare to comple- future technologicalchange and other subjectivepredic- ment the sNA, the basic accountingconventions in the tions. Giventhis uncertainty,such work seems at present two systems must agree. In particular, the distinction a candidatefor satelliteaccounts rather than total integra- betweenfinal and intermediateexpenditure and the ex- tion with the SNA. However,a substantiallink could be tent of capitalconsumption that is the differencebetween established by adopting "sustainabilityfactors." These gross and net domesticproduct must be agreedon if the factors would 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. followingchanges for the SNA. Hicks'sdefinition of income-"what you can consumein the period and be as well off at the end as at the begin- a. It wouldbe necessaryto introduce a balance sheet ning"-is equivalentto sayingthat new capitalmust be at for natural resources. least as great as capitalconsumed during the year so that b. Part of what is at present treated as gross operating the capitalstock at the end is at least as great as at the surplusfor exploitableresources would be treated as con- start. In this case a sustainabilityfactor would have a sumptionof natural capitaland would appear as such in valueof one or greater.A valueless than one impliesthat the productionaccount. too much capital has been consumedand that the con- c. An adjustmentfor the consumptionof natural capi- sumptionlevel is not sustainableindefinitely. tal wouldbe calculatedand appliedas a singleadjustment Despitethe simplicityof the definition,this conceptof of the economyas a whole. a sustainabilityfactor 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 now defined. Sustainabilityfactors for man-madecapital could be dis- e. Projects designed to enhance environmental re- aggregatedby assetand industry,and, evenat the detailed sourcessignificantly would be classifiedas natural capital micro or project level,sustainability factors for environ- formation.This attributionwould be appropriatewhether mental resourcescould be calculatedseparately for vari- the expenditurewas undertakenby governmentor indus- ous categoriesof land, for water, and for air. Further, try. since the factors are independent of price effects,they f. The estimatesof consumptionof 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. Sustainabilityfactors shouldbe introducedthat show logicalstep in derivingestimates of consumptionof nat- for all capital-man-made,natural, and human-the ratio IntroducingNatural Capital into the SNA 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 developedcountries and representativesof the international of sustainable income in the longer term and to empha- organizationsconcerned with collatingand publishingeconomic 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 present SNA was publishedin 1968 and is IIow in the cation E.69.XVII.3.New York. course of review,which started in the early 1980s and is ex- . 1984. A Frameworkfor the Developmentof Environ- pectedto lead to a revisedversion in 1991. The reviewprocess ment Statistics. StatisticalPapers, Series M, no. 78. New consistsof a series of three or four meetingsa year, each on a York. _ ~~~~~~~~5

MeasuringPollution uithin the Framework of theNational Accounts

Derek W Blades

The nationalaccounts could make a useful contribution To date onlyone attempt has been made to applysuch to environmentstatistics in the important area of meas- a model. This was developedby Victor (1972) for the uring certain aspects of pollution.Pollution is taklento Canadianeconomy and has been used to determinethe mean the disposalof waste solids, liquids, gases, heat, output of pollutantsassociated with one dollar's worth 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 clearlyvery heavy, partic- sides of pollution: the act of polluting, such as by dis- ularly since they involveinformation that is not usually charge of noxiousgases or fluids into the environment, collectedin industrialsurveys. In addition,however, there and the abatementof pollution,which covers government are at least two other reasons why relativelylittle interest monitoringof pollution levelsas well as measurestalken has so far been shownin this approach. by industryand householdsto reduce the output of pol- First, matrixesB and C containvarious units of volume, lutants.This discussioncovers two aspects of the act of suchas gallonsof wateror cubicfeet of nitrogenin matrix polluting(the output of pollutantsand pollutiondamage) B and millicuriesof cesiumor tons of sulfur dioxide in and two aspects of the abatementof pollution(the costs matrix C. Thus the entries cannot be aggregatedto pro- and the benefits of 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- erationalvalue of 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 study the generationof pollutantsby an extensionof the industryuses x gallons of water and emits y tons of conventionalinput-output table. Table 5-1 summarizesa chlorineis not in itself very helpful.Such data have op- model proposed by Ayres and Kneese (1969), which erational significanceonly when they can be related to showsthe overalleffect of economicactivity on 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 limitedinterest for most policypurposes because the data through the production-consumptioncycle and 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 conventionalinput-output table displaying Pollution Damage the commoditycomposition of intermediateconsumption by industries. Matrix B shows the amounts of various Pollutioncauses damages, such as sickness and pre- natural resources used in production, including "free" mature death, stunted growthof crops, disappearanceof resources such as air and water. Matrix C shows the wildlife,or corrosionof metalsand masonry.The national amountsof wasteproducts eventuallydischarged into the accountsreflect some of the costs of some of these dam- environment. ages in, for example,increased health expendituresby

26 MeasuringPollution within the Frameworkof the NationalAccounts 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 increasedoutlays for thority (1971) the costs of air pollutionwere deemed to repairing and maintainingbuildings, but they are not include, in addition to medical expenses, the value of explicitlyshown as costs of pollution damage. Wlouldit production lost through illness and death, the loss of be possibleto do so? Table 5-2 showsan input-output imputedincome of housewivesand students, and the so- table that could serve as a frameworkfor showingexplic- cial costs of prematuredeath and illness.The socialcosts, itly some of the costs of pollution damage that are in- whichwere by far the largestpart of the total, werebased cludedin the national accountsbut hidden at present. on a valueof £1,000 for each year of life lost and on the The columnsheaded DC indicate costs frorn pollution ranges of legal compensationawarded for sickness.The damage. Columns A and B are intermediate costs in- valuation procedures used for these various costs are curredby industryin, for example,cleaning polluted wa- often very arbitraryand subjectto great uncertainty.Just ter for human consumptionor industrialuse and protect- how uncertain may be judged from the results of studies ing buildingsand equipmentfrom atmosphericpollution. on the costs of air pollution in the United States pub- ColumnC would includethe costs of repairs to govern- lishedannually by the Councilon EnvironmentalQuality. mentbuildings because of air pollutionand-a large item For 1968, estimates of the cost of air pollution damage in many countries-the costs of medical services con- ranged from $8.1 billion to $20.2 billion,and for 1970 nected with pollution-linkeddiseases. Household expen- from $7.0 billionto $12.3 billion.Saunders (1977, p. 51) ditures on these medical services would be shown in observedthat "the range of uncertaintysurrounding such columnD, whichwould also includesuch cosis as insula- estimatesis enormous.It may be suggestedby the skep- tion to protect houses from traffic noise, air-filtering tics that the usefulnessof such figures. .. is in the sphere equipment,and water filters to remove chemicalsfrom of publicrelations rather than of socialscience." drinkingwater. The costs discussedabove in connectionwith Table Finally,column E includescapital outlays by producers 5-2 are less open to criticism on these grounds, since and governmentin connection with pollution damage. . they are alreadyincluded in the national accounts;they These would includepart of the cost of replacingbuild- only need to be separatelyidentified. While the difficul- ings and equipmentwhose lives have been shortened by ties of doing this should not be minimized(often the pollution. costs of pollution-relateddamage cannot be easilydistin- ColumnsA through E containonly a smallpart of the guishedfrom the costs of normalwear and tear), it seems total cost that could be attributed to polluticn damage. worthwhileto try to identifysome of the major costs of

Table 5-2. Input-Output Table Isolating Pollution Damage Costs P Grossfixed Prodlucers ...__- Government Private I capital 1 2 Total consumption consumption formation Stocks Exports Totals OtherDC DC Other -F DC Other DC Other DC Other Commodities 1 A BC D E 2

Total __ Indirect taxes .__._ Factor incomes Rest of world _ Note: DC = pollutiondamage costs. 28 Derek W Blades pollutiondamage. These might include,for example,the emient expenditures.The UnitedNations "Classification costs of treating pollution-linkedrespiratory diseases for of the Functionsof Government"(COFOG) identifies out- persons livingin large towns and the estimatedcosts of lays on both monitoringand abatement. Data on pollu- protecting buildings and machineryfrom atmospheric tion abatement expendituresby households, mainly in pollution. connectionwith vehiclesand home heating, are usually obtainedfrom producers rather than directlyfrom house- Costs of Pollution Abatement holds. There are some conceptualproblems in defining abatementexpenditures by householdsthat also applyto The third aspectof pollutionto be consideredconcerns expendituresby industries. These problems are consid- the costs borne by industries,and to a lesser extentlby ered below. governmentand households,to reduce the output of pol- To date the most rigorous, or at least the best-docu- lutants. Elsewhere in this volume, these costs are de- mented,efforts to compilestatistics on "pollutionabate- scribedas "defensiveexpenditures." The columnsheaded ment and control expenditures"(PACE) by industryhave PA in Table 5-3 show where these costs are currently been made in the United States by the Bureau of Eco- includedin the national accounts,although they are not nomic Analysis.The problems have been discussedby nowdistinguished separately. Cremeans(1974 and 1977). ColumnsA and B showpurchases of intermediateand First, there is what has been describedas the baseline primaryinputs for pollutionabatement. These represent problem.This is the difficultyof establishinga baseline the current operatingcosts incurred by industryfor this fromwhich to measurethe extent of pollutionabatement purpose.Column C showsgovernment spending for pol- activities.Long before the environmentbecame a fashion- lution abatement, mainlyin connectionwith monitoring able topic, producers,households, and governmentswere pollutionlevels. Household purchases of goods,such as controllingpollution to some extent. Shouldantipollution catalyticconverters to reduce emissionsof noxious ex- activitiesbe measuredfrom a zero baseline,so that they haust gases fromvehicles or less-pollutingequipment and covertraditional as well as newerabatement procedures, suppliesfor home heating, are shown in column D. Fi- or shouldthe baselinebe brought forwardto includeonly nally,column E shows businessand governmentinvest- recentlyintroduced control procedures?The second ap- ment outlaysthat are mainlyfor pollutionabatement. proach has been adopted in the United States; in effect Input-outputtables of the kind outlined in Table 5-3 pollutionabatement is definedas activities,like scrubbing have been quite widelyapplied. Models developed for the smoke or coolingwaste water, which are undertaken be- UnitedStates and the Netherlandsare describedin OECD cause of recent antipollutionlegislation. The use of a (1974), modelsfor Italyand the United States are out- mobilebaseline makes the definitionof abatementexpen- lined in Pearce (1976), and three different models for ditures somewhatfuzzy, but it is probablythe only prac- Japanare describedin OECD(1977). They have been used tical approachfor data collection.Respondents will have 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, because they have could be obtained from 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 Note: PA = pollutionabatement costs. MeasuringPollution within the Frameworkof theNational Accounts 29

The second difficultyis the problem of joint costs. rangingantipollution laws may be enacted,and, when this Some equipmentand industrialprocesses are both good happens, it is certainlyuseful to measure their effecton for business and less polluting. In such cases it is not industrialcosts. In other years, however,there may be no clear how much of the additionalcost of the equipment new legislationrequiring outlays on pollutionabatement, or process should be treated as a pollution abatement and there is then no obviousneed for a survey.In short, expenditure.In the United Statessurvey, respondents are 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 attributable to spe- than to considera continuoustime series. cial features for [air and water] pollution abatement" The second lesson is that the conventionalsurvey ap- (Cremeans1974, p. 62). Respondentspresumably base proach-mailing questionnairesto a large number of re- their best estimateon the costs of alternativemodels that spondents-may not be suitable for PACE statistics. As producethe same output as the equipmentaclually used noted, the U.S. questionnairerequires respondents to but that lack the model'sspecial antipollution features. In estimate some important componentsof PACE, but there the unlikely,but not impossible,event that a new pieceof are some pollutionabatement costs that have to be ig- equipmentis as productiveas an older model but less noredbecause respondents are unawareof them. In these pollutingand less costly,it wouldbe reasonableto attrib- circumstancesit maybe better to investigateintensively a ute a negativecost to the antipollutionactivity. The U.S. small number of establishments.The larger samplinger- surveydoes not attempt to identifysuch cases, perhaps rors probablywould be offsetby the smallernonresponse because of the difficultyof making accurate estimates. errors, and the enumerators could collect information However,new, less-polluting processes may sometimesbe about abatementcosts that the respondentsdo not rec- cheaperthan older,more-polluting ones. An often-quoted ognize as such. In addition, serious pollution problems exampleis the switchby pulp and paper manufacturers are confinedto a relativelysmall number of industries: fromsulfite to sulfateprocesses. Since the new methodis home heating, transport, electricity generation, chemi- both less pollutingand cheaper, the pollutionabatement cals, paper and pulp, and steel. Thus, an intensiveinves- involvedhas a negativecost. tigation of relativelyfew establishmentsmay yield accu- A third difficultyconcerns the respondent'sawareness rate data on the bulk of pollutionabatement outlays. of antipollutioncosts. For example, if new legislation forbidsopen-cast mining, the additionalexpense of shaft Benefits of Pollution Abatement mining should be counted as an antipollutien cost. In general, however,respondents would probablyoverlook One of severalbenefits that may result from pollution costs of this kind and would in any event have great abatementis the recoveryof usablematerials. In practice, difficultyin estimatingthem. Similarproblems arise when such benefitsare usuallyquite small, and, if they can be antipollutionpressures result in demandshifts from more- identifiedat all, the most convenientway to treat them in to less-pollutingproducts. Examples here include the a national accounts frameworkis probably as negative switch to unleaded gasoline,biodegradable zontainers, abatementcosts. Far more important are improvements and low-phosphatedetergents. These goods are all more in health, enhancedenjoyment from the natural environ- costlythan the more-pollutingitems they replace,but the ment, and related benefits that the communityat large producergenerally would not regardthe extra investment derivesfrom pollutionabatement. There are severalways and higher operating costs involvedin their production to valuethese indirectbenefits. as a pollutionabatement cost. Indeed, in the IJ.S. survey, One possible approach is to consider the damages such costs are explicitlyexcluded, and manufacturersare avoided.Thus, if it could be establishedthat a particular supposedto report only the outlaysincurred in reducing type of pollutioncaused 1,000 dollars' worth of damage, pollutionin their ownproduction processes. then it could be argued that abating this particular pol- Becauseof these problems,some criticshave suggested lution providesbenefits worth the same amount. Several that it is futileto try measuringbusiness outlays on pol- authors have indeed assumed that damage costs and lution abatement.However, this positionmay be too ex- abatementbenefits are 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 responding to a real measuringthe benefitsof environmentalprotection be- concern felt by policymakersand business people, who cause he "cannot formulate a question relating to the need to know the costs involvedin different pollution damagesof pollution that 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 lessons to be learned from the not generallybased on the assumptionthat the benefits U.S. experience.First, it may not be useful to compilea receivedequal the damagesavoided. Clothing is not val- time series for PACE statistics.In someyears several wide- ued at the cost-in terms of social ostracism or legal 30 Derek W.Blades penalties-of goingaround naked, and food is not valued Figure 5-1. Supply and Demand for CleanAir at the cost of starvingto death. In conventionalnational accounts,goods and servicesare valued in one of two Price ways.Goods and servicesthat are sold on the marketare Demand(D) valued at their market prices, that is, at prices that are \ assumedto measurethe purchaser'svaluation of the benefits derivedfrom them, whilegoods and servicesthat are PI providedfree or at heavilysubsidized prices are valuedat their cost of production. P3 The outputs ofpollution abatement-clean air and pure water,for example-obviouslycannot be 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 shown separatelyin the national accounts,users would have all the informationneeded to value the benefits of SI D3 pollutionabatement in preciselythe same way that the P3 benefitsof other publicgoods-national defenseor public administration,for example-are valued. This simple,orthodox method of valuationmay be 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 abatementunderstates the benefitsof abatementas judged 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 represented by 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) have suggestedhow this 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 problemmay be demonstratedin Figure 5-1. The by whichthe "at cost" valuationof abatementoverstates demand curve (D) shows how much air cleanlinessthe the market valuationof the benefits of abatement. market would buy at different prices, 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 askingpeople how muchthey sold on the market,the amount suppliedwould be 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 moderatelyclean A 2 type, the publicwould shrewdrespondents may declareno interest in payingfor buy it at price P2, and the valueof purchases-the num- any pollution abatement because they know that since ber that wouldbe recordedin the national accountsun- clean air and pure water are public goods, they could der householdconsumption expenditures-is represented never be excludedfrom enjoyingthem. This causes the by the area 0, P2, S2, A2. marketvaluation of abatementbenefits to be understated. In practice, of course, the level of air pollutionis set Anotherdifficulty is that it is not clear whetherrespon- not by the market but by governmentfiat. A government dents should be treated as buyersor sellers of clean air sensitiveto businesspressures might decide on lowabate- and water (Seneca and Taussig 1974). Should they be ment standards that result in air of the rather dirty A, asked how much they wouldpay to enjoya givenlevel of type, whilea governmentdominated by consumer inter- pollution abatement, or how much they would charge ests mightlegislate to 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 pollutionabatement costs) is representedby inhabitantsof a countryhave collectiveproperty rights in the smallarea 0, P1, SI, A,. However,the demandcurve their environment,would generally lead to a highervalu- indicatesthat the marketwould have paid Pi' rather than ation of abatementbenefits. To be realistic,however, it is P, for the amount of pollutionabatement represented by unlikelythat either question could elicit anything but Al, so that area P1, P1', D1, S, maybe taken as a measure fancifulresponses. People are simply not very good at of the extent to whichthe "at cost" valuationof pollution puttingprices on things that are never marketed. MeasuringPollution within the Frameworkof the NationalAccounts 31

In these circumstances,various indirect approaches may total damagescaused by pollution, they would indicate be used. For example,the benefitsof cleaninga lake may the successof abatementprograms in reducingpollution be valued by finding out how much people spend at damagesover a period of years. present to travelto the nearestunpolluted lake. This and National accounts have been widelyused to measure other indirect methods used in connectionwith water the costs of pollutionabatement. This is clearlyan impor- pollutionare summarizedin Kneese(1971). The benefits tant use, since policymakersneed to know the cost of of reducingtraffic noisemay be valuedby comparingthe alternativeabatement measures. Although there are some prices of houses subjectto differentnoise levels.Several problemsin definingand measuringabatement costs, in studies on airport noises in the United Kingdom are generalthe aimshould be to measurethe abatementcosts discussedby Pearce (1976). incurredby particularindustries in responseto particular The results of such studies have been used in some pieces of legislation.For this purpose, it willnot usually cost-benefitanalyses relating 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- investigationof a small sample of firms may be more roundedtheir findings,however, it is unrealisticto sug- effectivethan conventionalsurvey methods. gest that market measures of abatementbenefits could be includedin annual national accountsstatistics within References the foreseeablefuture. Valuationat cost is all that can reasonablybe achievedat present. Ayres,R. U., and A. V.Kneese. 1969. "Production, Consump- tion, and Externalities."American EconomicReview 59(3, Conclusions June):282-97. Councilon EnvironmentalQuality. Annual. Environmental This chapter has reviewedways in which national ac- Quality.Washington, D.C. counts statistics can be used to assess and manage a Cremeans,J. E. 1974."Capital Expenditures by Businessfor major environmentalconcern-pollution. More specifi- Air and Water PollutionAbatement, 1973 and Planned cally, it has examined how the national accounts can be 1974."Survey of CurrentBusiness 54(7, July):58-64. used to study four aspects of pollution: the output of . 1977."Conceptual and StatisticalIssues in Developing pollutants,the damagescaused by pollution,the costs of EnvironmentalMeasures: Recent U.S. Experience." Review abatingpollution, and the benefitsderivecl thierefrom. of Incomeand Wealth23(2, June):97-116. The use of national accounts to study the output of Jaszi, George.1971. "Review."Survey of CurrentBusiness 51(7, pollutantswill have a low priority in most countries.In- July)(Part II, 50thAnniversary Issue):183-227. formationon quantitiesof pollutantsemitted must be site- Kneese,A. V.1971. "The Benefit-Cost Analysis of Environmen- specificin order to be used to monitorpollution levels or tal Pollution."In Proceedingsand Documentationof the to designcontrol measures. National totals for the output UnitedNations tomasurs. dsigncontol Ntionl toals or te ouput sium on ProblemsEconomicRelating to Commission Environment.for New Europe York: Sympo-United of pollutantsare of limitedvalue for environmentalanal- Nationso ysis. It is unlikelythat the nationalaccounts can be used Nations. OECD (Organisationfor EconomicCo-operation and Develop- to measure the benefits of pollution abatement, at least ment).1974. Economic Implications of PollutionControL on a "market" basis. Although it may be theoretically Studiesin ResourceAllocation. Paris. possibleto attach market valuesto the benefitsof abate- _____ 77.Environmental Policies in Japan.Paris. ment, there are enormouspractical difficultiesin doing Pearce,D. W.1976. Environmental Economics. London and so. For the foreseeablefuture the only way the national NewYork: Longmans. accountscan be used to value the benefits of abatement Peskin,H. M.,and J. Peskin.1978. "The Valuation of Nonmar- is through the cost side. This method is used now by ket Activitiesin IncomeAccounting." Review of Incomeand nationalaccountants to valueother publicgoods, such as Wealth24(1, March):71-93. nationaldefense and public administration. Saunders,C. T. 1977."The Feasibilityof Welfare-Oriented One can take a more positive attitude toward other Measuresto Supplementthe NationalAccounts and Bal- aspectsof pollution.Although it is difficultto define and ances:A TechnicalReport." Studies in Methods,Series F, measurein full the costs of damagescaused by pollution, no. 22. NewYork: United Nations. it seems feasibleto identifysome of the costs that are Seneca,J. I., andM. K. Taussig.1974. Environmental Econom- alreadyimplicitly included in the nationadaccounts. Ex- ics. EnglewoodCliffs, N.J.: Prentice-Hall. ampleshere includepollution-related medical expenses in UnitedKingdom Atomic Energy Authority. 1971. An Economic the final expenditures of governments and households as and TechnicalAppraisal of Air Pollutionin the UnitedKing- well as outlays for pollution-causedrepair and mainte- dom.London: Her Majesty's Stationery Office. nance in the intermediate consumption of industries. Al- Victor,Peter A. 1972. Pollution:Economy and Environment. though these expendituresconstitute only part of the London:Allen and Unwin. CorrectingNational Income for EnvironmentalLosses: Towarda PracticalSolution

Roefie Hueting

An increasein nationalincome is often called economic mental functions could then be establishedand entered growth. It is identifiedwith increased welfare and con- in the Systemof National Accounts(SNA) as cost items ceivedof as an indicatorof economicsuccess. However, when they occur. this terminologyis incorrect for a number of reasons. Unfortunately,shadow prices for environmentalfunc- One of these is that the apparent increase in national tions can be constructed only in exceptional circum- incomemay be accompaniedby the degradationof a vital stances.It is possiblein principleto estimatethe cost of scarce good: the environment. The misconceptionof measures that lessen the pressure on the environment terms reflectsthe beliefthat things go well,economically and thus preservethe desired uses of the environment. speaking,solely when production,as measuredin gross These so-calledelimination costs may be regarded as domestic product (GDP), increases. This belief also in- productioncosts of an environmentalfunction. With the cludesthe convictionthat an increasein GDP is necessary aid of calculationsof the costs of various degrees of to solve the environmentalproblem, since this creates elimination,supply curves for environmentalfunctions room for financingthe conservationand 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 environmentaldeterioration is a mandfor environmentalfunctions usually cannot 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 nomicpolicy stresses the 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 ProperCaveats environment. This depletion, in turn, endangers sustained economicdevelopment. This gave a great impulse While work is goingon to correct the measurementof to the ideas of Kuznets,who suggestedas early as forty GDP, one recommendationshould be implementedimme- years ago that national income be corrected to provide diately:proper caveatsshould be used and additionalfacts politiciansand the public with a better insight into the should be presented in the yearly publications of the developmentof welfareover time (Kuznets 1947, 1948a, nationalaccounts. 1948b). Thus, it has to be stressed that an increasein national A bigstep in the right directionwould be possibleif all incomeis not identicalto economicgrowth and economic the factors that influencewelfare could 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 involve constructing shadow factorsare the environment(including nature and natural prices for environmentalfunctions (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. With the aid of these, the value of the losses of environ- Therelation between production growth and environment

32 CorrectingNational Income for EnvironmentalLosses 33 in the past must also be made clear. The burden on the paid for by the governmentor private households, or environmentis equal to the product of the number of whenthey are taken by privatefirms but financedthrough people and the amount and type of activityper person. levies imposed by the government, they are currently Sustainableeconomic development therefore requires that 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 adaptationsmay decrease GDP in the short run but will for national incomeis composed.For the losses of envi- providesustained economic development in the long run. ronmentalfunctions are currentlynot entered as costs at It shouldalso be kept in mind that the SNA'S main value the time they occur, and therefore their restoration or is for short-termmacroeconomic analysis. Finally, market compensationshould not be entered as a finaldelivery at prices do not indicatethe marginalutility of goodswhen the momentit is undertaken. This procedure cannot be their productionand consumptionare at the expenseof changed because it is impossibleto construct shadow scarce environmentalfunctions. prices.It is thereforedouble counting to enter outlaysfor In additionto such caveats,as much quantitativeinfor- compensatingthese lossesor for eliminatingthem as final mation as possibleshould be providedon the losses of consumption.Expenditure on preventingand compensat- environmentalfunctions and their consequences.To the ing environmentallosses does not contributeto the quan- extent possiblethis should be done in rrmonetaryterms, tity of consumergoods; these outlays protect or replace such as compensationand eliminationcosits and financial scarce environmentalgoods that were already available. damage. This can be supplementedby information ex- (Some of the disadvantagesattributed by 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, may be interpretedas losses of function species.The figures in physicalterms can be related to resultingfrom spatial competition,and the expenditure standards for environmentalfunctions and will thus de- on this as the cost of compensatorymeasures.) 2 scribe their availabilityor loss. For exarnple,if certain Most authorities in this field, including most partici- thresholdsof emissionsand subsequent concentrations pants in the uNEP-WorldBank workshops on environ- are exceeded,the function of surface water as a basic mental accounting,favor either merely isolatingthe de- materialfor drinking water is lost. The informationin fensive outlays for the environment or isolating and physicalunits could be collectedin so-calledsatellite ac- correctingfor these items in an alternativepresentation counts of the nationalaccounts (Theys, Chapter 7). of national income alongsidethe current one. In both The recommendationsmade 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 physicalinformation on the environment-can and poses, but the interactionbetween production and the should be implemented immediately.T'he rest of this environmentwould be better understood, and the ability chapter reviewsthree optionsfor correctingC.DP. to provide informationin physicalunits and to collect these data in satelliteaccounts would, of course, not be Correcting National Income for Defensive hamperedat all. Environmental Outlays The approach of isolating and correcting, however, seems preferable.The politiciansand the public,who are Whennational incomeis calculatedaccording to pres- now givenonly one figure of income,would then realize ent conventions,several activities that have a cost char- that part of the increasein nationalincome consists of an acter, and therefore ought to be entered as intermediate increase in cost, since defensiveenvironmental outlays deliveries,are currentlydesignated as finadconsumption. are increasing(Leipert 1987). If the income correction Kuznets,one of the great theoreticiansof the conception was made, however,several clarifications 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,expenditure inherent in participationin the tech- of environmentallosses are neither restored nor compen- nicallyand monetarilycomplex civilization of industrial sated. countries,and the majorpart of governmentactivity), the * The mutations in both the current and corrected expenditureon measuresthat compensatefor, redress, or figures of GDP do not represent economicgrowth or the guard againstlosses of environmentalfunctions could be course of welfareover time. added.These expenditures are currentlye:ntered as inter- * Reallocationby shiftingthe productionand consump- mediatedeliveries insofar as the measures,are taken, and tion packageon behalfof the environment(for example, directlypaid for, by privatefirms. When the measuresare more bicyclesand publictransport and fewerprivate cars 34 Roefie Hueting becauseof the pressureof physicalrestrictions and levies) * In order not to make the questioningunjustifiably constitutesa sacrifice.This is not reflected in the SNA, vague,some research on environmentalaccounting has 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,which wasmade with- forth are not homogeneousgoods from an economicpoint out regardto environmentalconsiderations. The shiftswill of view,as water and air have quite a few different eco- often lead to a check on productiongrowth. This is auto- nomic functions.If the persons being questionedare to maticallyreflected in the SNA but is not visible. have a clear picture of the issues, they must be given * Isolationand correctionform part of a broader field informationon the significanceof the differentfunctions, of defensiveoutlays (see Hueting1980; Kapp 1963; Kuz- the consequencesof their loss, and the measures and nets 1947, 1948a, 1948b, 1954; Leipert 1986a, 1986b; costs involvedin their restoration.All together this con- Mishan1984; and Tinbergen1985). stitutes a huge amount of information,which would not be easyto survey.Although the willingness-to-paymethod ComplementingCorrections for Defensive Outlays might be justified for one or two factors affectingthe through Surveys immediateliving conditions of people asked, it is most probablynot a sound base for correctingnational income The possibilitiesfor preferences for the current and for all environmentallosses. future use of environmentalfunctions to manifestthem- * People may be interestedin the effectsof their bids, selvesin marketbehavior are verylimited (Hueting 1980). together with the (unknown)bids of others, on, for in- Thereforeefforts have been made to trace these prefer- stance,.employment levels and consumptionpatterns. For ences by askingpeople how much they wouldbe prepared answeringlegitimate questions about this, studiessuch as to pay to whollyor partially restore lost environmental the scenario study mentioned below have to be elabo- ftsbeing th rated, and the resultshave to be presentedto the persons dfncton willingnessto pay.cHoweverm this method does questioned.This hardlyseems feasible.Again, what might notneo alwaysalwillinnes provide reiable tolpay. eStimateS Howeverfor this many methods.reasons. be justifiedon a micro scale is most probablynot justified on a macro scale. Informationon the significanceof environmental * Askingpeople how much they are prepared to pay functionsis deficientin manycases. This is especiallyso suggeststhat conservingthe environmentalways requires for the functionsthat determinethe future qualityof the extra provisionsthat must be paid for. In quite a few environment.For these (life-support)functions there is cases, however,conservation is a matter of refraining oftenthe risk that interruptingcomplicated processes, for from doing things rather than of doing them, and this instance,ecosystems, may lead to seriousovershoots and savesrather than costs money.Thus, not buildinga road collapse, and the chance that technologies not yet in- through a mountainousarea that is vulnerableto erosion vented or operationalmay cope with those risks. Many is cheaper than buildingit, cyclingis cheaperthan driv- peoplemay not be able to weighthese risks and chances, ing, wearing a sweater and using an extra blanket is and thus to answerhow much they are prepared to pay cheaper than raising the temperature,and confiningthe for avoidingthem. Accordingto the biologicalliterature, consumptionof lettuce to the summerseason is cheaper the possibilitythat overshootsand collapsemay occur if than eating it throughout the year. People who realize the growthpattern of production(and population)is not this may modifytheir answersbecause of such considera- changedconstitutes the most importantpart of the envi- tions. ronmental problem (see, for example,Odum 1971). If * Some peoplewill probably be convincedthat it does individualsare not awareof the importanceof an environ- not matter what they bid because their bid willnot influ- mentalfunction, the surveymethod is pointless. ence environmentalpolicy at all, and this convictionwill * There is a considerabledifference between saying influencetheir bid. that one is willingto spend money on something and * Some people may think they have a "right" to a actuallypaying for it. healthy and safe environmentand will probably react * The questioningmethod in fact tries to approachthe accordinglyby not makinga bid at all. valueof a collectivegood as if it werea privatemark.etable a Some people willprobably have their doubts about good (bytrying to find somepoints on the demandcurve). the participationof others (the Prisoner's Dilemmafrom In a market the bidder knowsfairly well what qualityand game theory) or prefer to wait and see (the Free Rider quantitycan be acquiredby differentbids. In a collective Principlefrom the theoryof collectivegoods). situation, however,this is not possible,because it is not * The environmentis an important collectivegood. knownhow much other people are goingto bid. Without But it is not the only one. Dikes, public administration, a considerableamount of additionalresearch it is also and the army are too, while police and education have not knownhow much moneyis requiredto attain differ- clear collectiveproperties. To be sure of not exceeding ent qualitystandards for the environmentalfunctions. budget restrictions,people also have to be questioned CorrectingNational Income for EnvironmentalLosses 35 about how much they are prepared to pay for the other mates of the expenditure on the measures required to collectivegoods of the society.This hardlyseems feasible. meet physicalstandards for the availabilityand qualityof Again,what might be justifiedfor one or two separate environmentalfunctions (includingnature and natural environmentalagents on a micro scale maybe impossible resources).4 The standards can in turn be based on the on a macroscale. prerequisitesof health and a sustainableeconomic devel- * The willingness-to-paymethod also measures the opment,that is, developmentwith sustainable yields. This consumer'ssurplus. In national incomethe total valueof seemsthe most naturalguideline for setting standardsfor the goods is found by multiplyingthe quantity of each environmentalfunctions. Standards and the measures good by its respectiveprice and then adding togetherthe based on them may refer to the occupationof space, the resultingamounts. Using this procedure,the consumer's use of soil, the availabilityof stocks of natural resources, surplus is not expressedin the levelof nalional income. the compositionof products, the consumption of raw Thus, a doctor who saves a patient's life creates a value materialsand energy,the emissionof pollutants,and the that, whateverone may think about its exact size, is concentrationof chemicaland other agents. certainlyhigher than the valueadded recorcled in national The standards can be related to environmentalfunc- income.The intra-marginalutility of goods,which is ig- tions. Thus it is possibleto formulatethe wayin whicha nored in nationalincome, will approach an infinitevalue, forestshould be exploitedto attain a sustainableuse of because it includes the utility of the first unit of food, its functions.These functions could include being a source drink, and so forth. For this reason the results of willing- of wood, regulator of the water management,preventer ness-to-payresearch are not suitableto be used in con- of erosion, buffer of carbon dioxide and heat, regulator junction with the figures of national incc,me.An addi- of the climate,gene reserve,object of studyfor ecological tional objectionto incorporatingthe consumer'ssurplus research,supplier of natural products for the local popu- in the willingness-to-payapproach is that the results relation,and source of incomefrom tourism. The estimated flect the income distributionmore directlythan do the expenditureon the measuresrequired to meet those stan- prices of market commodities;the differencesbetween dards then indicatesin monetaryterms how far a nation rich and poor in the weightsof the "votes"become greater has drifted awayfrom its (supposed)end or standard of whenthe consumer'ssurplus is included.The occurrence sustainableuse of its forestresources. of differencesin weightsof "votes" is often defendedby Likewiseit is possibleto formulatethe way in which the argumentthat the contributionto the nationalpack- surfaceand groundwatershould 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 higherbecause of the greater include water for drinking,for agriculture,for cooling, relative scarcityof their abilities.This argument is not for flushing and transport, for industrial processes, for valid with regard to the environment,because it is not recreation, for navigation,in the natural environment, producedby humanity. and for wastedumping. The estimatedexpenditure on the Becauseof the limitationsmentioned above, the willing- measuresrequired to meet those standards would indi- ness-to-paymethod does not present a firm enoughbasis cate in monetaryterms how far a nation has drifted away for correctingnational income for lossesof scarce envi- from a sustainableuse of its water resources.The same ronmentalfunctions. A correctionbased on this method holds true for the use of air, soil, and space. maylead to inaccurate estimates of envi.ronmentalde- The measuresmay range fromselectively cutting trees, mlea. reforesting,building terraces, draining roads, maintaining mine, buffersin the landscape,and selectivelyusing pesticides and fertilizersto buildingtreatment plants, recirculating Complementing Corrections for Defensive Outlays materials, introducing flow energy, altering industrial through Standards for Sustainable Economic processes,making more use of public transport and bi- Development cyclesinstead of private cars, and using space so that plant and animal species have enough room to survive. It can be concludedfrom the abovethat the correction Whenput into practice,these measureswill lead, in one of nationalincome is highlydesirable. But shadowprices wayor another,to different-sustainable-productionand for environmentallosses that are directlyccmparable with consumptionpatterns. It followsfrom the earliersections market prices (on which national income figures are in this chapter that the levelof welfarewill not decrease based) can be constructedonly exceptionally, because the if people prefer to maintain a sustainable development intensity of the preferencesfor the present and future rather than to risk the overshootsand collapseinherent availabilityof environmentalfunctions can 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 supplementingthe cor- becausein manycases it is impossibleto constructshadow rections for defensiveenvironmental outlays with esti- pricesfor environmentalfunctions. 36 RoefieHueting

Table6-1. Comparisonof Traditionaland EnvironmentalScenarios (1980 = 100) Traditional Environmental Aspects growthscenario scenario Plant and animalspecies Further deteriorationby, among Checkeddeterioration or even other things, increasedproductivity improvement in agriculture,more use of space, and more use of persistentcom- pounds;only measuresagainst pol- lutionhave been 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 Other heavymetals 109 57

Persistentorganic compounds - 7 0 b Phosphates 81 29 Oxygendemand 35 17 Thermalload 139 44 Solidwaste 152 108 Harborsludge - 100 Energyrelated 1,400 467 Gypsum 210 90 Industrialslag 358 136 Chemicals 91 64 Radioactivewaste Laboratorywaste 100 100 Nuclearenergy waste 300 0 Reprocessingwaste 598 0 Fissionablematerial 633 0 Energyinput 123 81 Coal 505(605)c 292 Uranium 463(0)' 0 Landscape Further deterioration(see plant and Checkeddeterioration or even animalspecies) improvement Livabilityof cities - Improvement Production CDP 164 127 Agriculture 181 135 Industry 321 177 Services 181 145 Availableincome per capita 116 104 Unemployment 82 83 Employment 110 111 Tax burden 98 103 -= Not available. a. Thisfigure is notconsistent because the carbon monoxide emissions of processesand stationary sources are missing. b. Veryrough estimate. c. If nuclearenergy is not used,coal input increases. Source: Hueting1987. CorrectingNational Income for EnvironmentalLosses 37

The expenditurenecessary to carryout thesie(and sim- The main results of the study are shown in Table 6-1. ilar) measurescan be estimated.The sum ofthe amounts The total net expenditure(or cost of forgoneproduction) found wouldindicate in monetaryterms how far the na- to meet the conditionsor standards set in the environ- tion has drifted awayfrom a sustainableeconomic devel- mental scenario is equal to the difference in gross na- opment. This indicatorcan be used in conjunctionwith tional product (GNP) betweenthe two scenarios in 2000. the figuresof the nationalincome, which, after correction The benefits (in regained and safeguardedenvironment) for defensiveoutlays, shows how far the nation has pro- are equal to the differencesin the environmentalindica- ceeded in raisingthe levelof production. tors in 2000. A similarstudy is in progress for Taiwan No measurescan be formulatedfor irreversiblelosses. (Hueting1986a). If plant and animalspecies become extinct, no restoration An example of a practical application of correcting measures are possible.The same probablyholds for the nationalincome figures, albeit not based on standardsfor total loss of the topsoil of a mountainousarea. An arbi- attaininga sustainableeconomic development, is the study trary value then has to be assignedto these losses, of by the Economic Council of Japan, which developsa whichone can say for certain onlythat the valueis higher measure of net national welfare. In this approach the than zero. nationalincome figures are corrected not only for actual A more or less similar problem seems to arise for expenditureon compensationand restorationof environ- nonrenewableresources. Once oil has been exploitedand mental functions,but also for the estimatedcost of the exportedor used, it is gone forever.This loss constitutes measures necessaryto 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). alternatives are 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 standardswas elaborated there (Economic costs) of the resource willsuffer a severeeconomic loss. Councilof Japan 1974, pp. 99ff). Since the prospect of a safe and prosperous future for De Groot(1986) can also be mentionedin this respect. one's childrenand one's children'schildran is a normal In that study the ecologicalparameters are formulatedfor human need, the diminutionof the reservesof nonrenew- the performanceand sustainableuse of, among others, able resources such as oil constitutesa cost here and the functionsof water purification,fishery, game animals, now. and nursery.The StimulationProgramme for Researchin The depreciation of nonrenewableresources can be HumidTropical Forest Lands (Tropenbos)is now con- valued by estimatingthe costs involvedin the develop- ducting research 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 how to bring these conditionsinto practice (Bax and methods. others 1986; Ross and Donovan1986; Grainger 1987; An example of a practical application is a scenario Hueting1986b). Apart from these and other, more inte- studyelaborated for the Netherlands(Hueting 1987). This gral, approaches,numerous studies notablyon the meas- study scans the effects on the level of production and ures and costs involvedin reducingemissions of harmful employmentof the transition to a sustainableeconomic agents have been carried out in quite a few countries. developmentbetween 1980 and 2000. The conditionsor Somehealth standards havebeen establishedfor the con- standards for such a developmentand the measures to centrationof harmfulagents allowed for variousfunctions meet these conditionsor standards were formulatedby of water and air, such as drinking,swimming, and physi- specializedscientific institutes. The estimated costs of ologicalfunctioning. these measureswere enteredinto the econometricmodel, From these experiences it seems feasible to correct which then scanned the effects on production and em- national income figures on the basis of standards for ployment.The results were contrastedwith the results of health and a sustainable economic development. The a scenario based on a traditional growthpolicy, elabo- method has three advantagesand four drawbacksor im- rated alongsidethe environmentalscenario. Thus, com- perfections. parison of the outcomeof the two scenarioscan indicate The first drawbackis that the results of the approach the differencesbetween a policy aimingat sustainability do not represent individualvaluations in the true sense, and one aimingat increasingthe nationalincome accord- as has been extensivelyexplained above. For, among other ing to the present pattern. Because the environmental things, the intensity of the preference for a sustainable scenario makes an important step in the directionof a economicdevelopment cannot be measured.This simul- sustainableeconomic development over the wholefield of taneouslyimplies, however, that the intensityof the pref- productionand consumption,comparison olf the 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 corrected accordingto productionand consumption,and thus for the growthof standardsfor a sustainableeconomic development. GNP, is equallyunknown. Both of these aspects shouldbe 38 RoefieHueting clearly mentioned when the results of the method are environmentseveral possible uses can be distinguished.These presented in the publications of the national accounts. are calledenvironmental functions. When the use ofan environ- Second, the method ignores the loss of welfare suffered 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 tainreruingthelfore-susofutaionabe d lourpmenet).(whee ps between functions,the environmenthas an economicaspect. a prerequisite for a sustainable development). These pref- Competitionbetween functionscan be qualitative,spatial, or erences could be compared with the preferences for cre- quantitative.Qualitative competition amounts broadly speaking ating and maintaining art or churches. This might not be to pollution:the use of the environmentalfunction "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 (for instance,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 existingdemand for 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 potential utilitiesof ecosystems,now and in the future,and to retain the diversityof speciesof our planet. The first advantage to the method is that it seems to Competitionbetween functions can take all sorts of forms. But provide an acceptable supplement to national income fig- in most casesit is a questionof the environmentbeing used for ures by indicating the losses of environmental functions productionand consumptionactivities at the expenseof another in monetary terms, since shadow prices cannot be con- desireduse (Hueting1980). structed. 2. This chapter followsthe usual procedure of classifyingas Second, the method compels the definition of an exact compensationcosts expendituressuch as extra provisionsfor content of the term "sustainable economic development." the drinking water supply,building swimming pools when the Without such a content the term remains vague and not waterhas been polluted,or travel costs to natural parks when operational for economic policy regarding the environ- natural areas in the vicinityhave disappearedand of classifying ment. as financialdamage such effectsas diminishedproductivity because of damageto crops and acceleratedcorrosion or 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 conserveand restorethe environmentis classifiedunder willing- on the state of the environment. The formulation of the nessto pay.Some authors, however,place all of these categories measures to meet the standards and the estimates of the under willingnessto pay. expenditure involved are indispensable for policy deci- 3. An overviewof the methods used, includingquite a few sions. In other words, the work necessary to supplement results(albeit not in the contextof correctingnational income 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, environmentalfield, see Kapp(1972, pp. 17 ff). Based on the arguments given above, the national in- 4. When the applicationof all availabletechnical measures is comefigures shudbecreceoinsufficientto meet a standard, the estimatesmust be supple- come figures should be corrected for the losses of envi- mentedwith the market valueof the reduction in activities(in ronmental functions (including resources) on the basis of additionto the measures)necessary to meet the standard. standards for health and a sustainable economic development. 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 Global ResearchProgramme to Conserve and Develop course of sustainable economic development. TropicalRain Forests.Tropenbos Information Series 1. Ede, Netherlands:Tropenbos. Notes Economic Council of Japan. 1974. MeasuringNet National Welfareof Japan. Tokyo. 1. This chapter uses the conceptof environmentalfinctions, Ewers,H. J., and Werner Schulz.1982. Die monetarenNutzen which was designed to describe the economicaspect of the gewasserguteverbessernderMassnahmen-dargestellt am environment.For an economicapproach, the environmentcan BeispieldesTegelersees in Berlin.Berlin: Erich SchmidtVer- best be interpretedas the physicalsurroundings of humans,on lag. whichthey depend completelyin all their activities.Within the Grainger,Alan. 1987. Report of the 7iel Consultation27-31 CorrectingNational Income for EnvironmentalLosses 39

October1986. TropenbosInformation Series 3. Ede, Neth- . 1948b. "Discussionof the New Department of Com- erlands:Tropenbos. merce Income Series (NationalIncome: A New Version)." Groot, R. S. de. 1986. "Functionsand SocialEconomic Impor- Review of Economicsand Statistics30:151-79. tance of the Dutch Waddensea."Agricultural University, . 1954. "NationalIncome and EconomicWelfare." In Wageningen.Processed. SimonKuznets, ed., EconomicChange. London. Hueting, Roefie. 1980. New Scarcity and Economic Crowth. Leipert,Christian. 1986a. "SocialCosts of EconomicGrowth." Amsterdam:North-Holland. Journalof EconomicIssues 20(1): 109-31. . 1986a. "Reporton MyVisit to Taipei as an Adviserfor . 1986b. "What the GNP Does Not Accountfor." Devel- the Taiwan2000 Study."Central Bureau of Statistics,Voor- opment:Seeds of Change(3):58-65. burg, Netherlands.Processed. _ . 1987. "Folgekostendes Wirtschaftsprocessesund Volk- . 1986b."Framework for a Cost-BenefitAnalysis for Dif- swirtschaftlichteGesamtrechnung; Zur Identifikationvon ferent Uses of a Humid Tropical Forest Area." Paper pre- steigendenkompesatorischen Ausgaben in der Sozialproduk- sented for the Tropenbosseminar, September 22-24. Tro- trechnung."Projektbericht. International Institute for Envi- penbos, Ede, Netherlands.Processed. ronmentand Society,Berlin. Processed. . 1987. "An EconomicScenario That GivesTop Priority Mishan,E. J. 1984. "GNP: Measurementor Mirage?"National to Saving the Environment."Ecological Modeling 38:123- WestminsterBank QuarterlyReview (November):2-13. 40. Odum,E. P. 1971. Fundamentalsof Ecology.3rd edition.Phi- Kapp, K. W. 1963. Social Costs of Business Enterprise.Lon- ladelphia:W. B. Saunders. don: AsiaPublishing House. Ross, M.S., and D. G. Donovan.1986. "WorldTropical Forestry . 1972. "SocialCosts, Neo-Classical Economics, Environ- ActionPlan: Can It Save the TropicalForests?" Journal of mentalPlanning: A Reply."Social Science Information 11(1): WorldForest Resources Management 2:119-36. 17-28. Schulz,Werner. 1985. Bessere Luft, was ist sie uns wert?Eine Kneese, A. V. 1984. Measuringthe Benefits of CleanAir and gesellschaftlicheBedarfsanalyze auf der Basis individueller Water.Washington, D.C.: Resources for the Future. Zahlungsbereitschaften.Berlin: Erich SchmidtVerlag. Kuznets,Simon. 1947. "NationalIncome and IndustrialStruc- Tinbergen,Jan. 1985. Production,Income and Welfare:The ture." Proceedingsof the International Statistical Confer- Search for an Optimal Social Order.Whitstable: Harvester ences, Vol.V (The EconometricSociety Meeting, September Press. 6-18, 1947,Washington, D.C.). Calcutta. . 1948a. "Onthe Valuationof SocialIncome." Economica (February/May):1-16,116-31. 7

Enironmental Accountingin DevelopmentPolicy: The FrenchExperience

Jacques Theys

The French experience might be a valuableguide in * Level11 comprisescomposite yet sectoral statistics evaluatingthe outlook for environmentalaccounting, be- on water,atmosphere, land, noise, and so forth; these are cause originalconcepts have been developedand a wide generally by-productsof administrativeactivity. During range of statistical tools tested there during the past the past severalyears, statisticaland documentarydata decade. The French examplethus makes it possibleto banks havebeen addedthat coversuch areas as industrial take rapid stock of the manydifferent approaches taken risk, marine pollution,regional flora and fauna, and the by the developedcountries, for whichit has provento be cost and efficiencyof nonpollutingtechnologies. an exemplarytesting ground. In a period of economic * Level III features comprehensivestudies published crisis, the concern to incorporatethe environmentmore periodicallyor compiledfrom a wide range of sources: effectivelyin economic policy has in recent years led national (and, more recently,regional) reports on the France to promote the establishmentof "natural patri- state of the environment,indicators of progress in meet- mony accounts," which are similar to Norwegian "re- ing the nationaleconomic plan, or a compilationof 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 information system. Their expenditure,damage costs, and the macroeconomiceffect part in the planningprocess, and the very methods by of environmentalpolicy. which they are drawn up, are meaningfulonly in this * LevelIV contains actual environmentalaccounting. overallframework. On the one hand, there are patrimonyaccounts, which willbe discussedlater and whichare usuallyexpressed in physicalterms. On the other hand, there are satellite The French Stratified System of Information accounts,which are meant to organize primarilymone- tary data. Peripheralto the national accountingsystem Informationcurrently available on the environmentin (whose accountingnomenclatures it borrows), satellite France is formallyorganized into a hierarchicalsystem accountingis designedto assess national environmental that comprisessix levels,ranging from field data (which expenditure,its funding,and its beneficiaries.As yet, only are extremelyfragmented) to global indicators of the a fewcategories of this systemhave actuallybeen set up: qualityof life and pollution(Figure 7-1). water,waste, national parks, 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 basis for data, either specificto the environmentalfield (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 foreign trade of variousenvironmental can vary considerablybecause there is no adequate sys- policies. The second (SPIRE) operates in the opposite tem of standardization;for example,attempts to institu- directionand is used to assess the pollutionor resource tionalizeecological balance sheets in businessfirms have extractionlevels linked to variousdevelopment strategies failedthus far. or alternateproduction and consumptionprocesses.

40 EnvironmentalAccounting in DevelopmentPolicy: The FrenchExperience 41

Figure 7-1. The French EnvironmentalData 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'ost - <_ of environmental1 policies< Models on the environmentMareomi

_/ ~~~~~~ ~ ~~(SPIRE)(POLLEN) models

of theEeffectsof of macroeconomic ffects acconts _. patrimony Level IV [\P Environmental accounts Accounts Patrimony account satellite account National accounts

t LevelLState \ of the Regional reports 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 Sectoralr, i . Data banks statistics ~WaterAir Soil Flora/ Others fauna

Level I Specific data Nonspecific data 1 DisLevel 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.

* LevelVI concerns quality-of-lifeindicatoirs. 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 severaladditional representative indexes 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 undertaken to assess results in publicationson the cost of damagescaused by 42 JacquesTheys pollution,general macroeconomic theories on whichthe systemis a long-standingcriticism of the inadequaciesof operationof the SPIRE and POLLEN modelsdepends, and GNP and economicaggregates as welfareindicators; this demographicand economic statistics that are used to also existsin severalother developedcountries. Bertrand supplementreports on the state of the environmentand de Jouvenel(1966) officiallyproposed that the national to build up basic data. More recently,a connectionwas accountsinclude environmental services, the cost of pol- establishedbetween the naturalpatrimony accounts drawn lution, and resourceextraction. He did not want to abol- up by the Ministryof the Environmentand economic ish existingstructures, but to appendsupplementary com- patrimonyaccounts established by the NationalInstitute ponentssuitable for long-termuse. of Statistics.2 Theseinterfaces all representareas in which It became clear, however,that a simple adjustmentof the environmentcould potentiallybe incorporated in a the existingsystem would not be sufficient.That is why, generalpolicy framework. after the existing environmentaldata systemswere first The structure described above is not the result of a critiqued,it took ten yearsbefore a decisionwas made to preestablishedplan, but of an empiricalcombination of establishthe patrimonyaccounts. Muchdata on the en- sets of data compiledto meet specificneeds over time. vironmentis available,but it is poorly integratedinto the The variouslevels have developedin a quasi-independent planningsystem because it is fragmented.It is also diffi- manner.Initially, models were constructedand indicators cult to competewith a systemof economicdata shaped weredeveloped very rapidly and reliedheavily on nonspe- by decadesor centuriesof accountingpractice. cificdata (on productionactivities) and experts'statistics. What is neededto developenvironmental accounting is Over the years,statistics collectedin the field(for exam- a process similarto the one forty years ago, which pro- ple, the results of monitoringnetworks) began gradually duced the Systemof National Accounts (sNA). Such a to replace estimates,thus facilitatinga broader dissemi- process would develop a consistent frameworkthat re- nation of comprehensivedocuments, such as reports on flects the complexityof the relationshipbetween human- the state of the environment.In the late 1970s a partial ity and nature as clearlyas possible;would create a stan- reorganizationof data based on accountingprinciples dardizedlanguage, which may be adoptedby economists, and data banks was envisaged.Subsequently, statistics environmentalmanagers, and scientistsalike; and would were compiledon a regionalbasis and field data were devisea streamlinedset of indicatorsto serve as a basis standardized. for decisionmaking. The developmentof this data base explainsin part why todaythese variouslevels are not regarded as formingan Assessing nature in all of its dimensions.The French integratedsystem. The drawbacksof this type of step-by- accountingsystem attempts to includeall componentsof step processare a certain amountof duplication,wastage, nature that can be quantitativelyor qualitativelychanged and a lack of connectionsbetween different bodies of by human activity.Components that lie outside the realm data. The advantageis that each componentis adjusted of human influence(such as geomorphology,solar rays, to the specificrequirements for whichit was designed.In or magneticfields) are thus excluded.Defined this way, this connection it would be interesting to determine naturalpatrimony can be consideredas: whetherempiricism-and the associatedwastage-are un- * A collectionof isolated components:nonrenewable avoidable,or if the developingcountries can be spared components(such as metallicore or fossilfuel), environ- this stage of a trial-and-errorapproach in order to be able mental media(soil, water, and the atmosphere),and living to proceeddirectly to the accountingstage. organisms(such as animalsor plants)

An AccountingSystem for NaturalAssets: * A set of ecosystems,that is, relationshipsbetween French Patrimony Accounts components within specific systems (such as forests, groves,heaths, grasslands,wet areas, and coastal ecosys- Despite the diversityof availabledata, there was no tems) instrumentthrough whichthe conditionsof the long-ter-m * A set of territories, that is, spaces delineatedeither regenerationof nature couldbe taken into accountwithin geographically(such as mountainsor coastalland), insti- the overallframework of economicdevelopment. For this tutionally,or abstractly(such as grids or observationnet- reason, in 1978 France decidedto designan accounting works). systemto assess both quantitativelyand qualitativelythe Naturally,these groups are not analyzedseparately, but state and the developmentof the natural patrimony,as in terms of their relationshipswith other natural compo- wellas the causesand effectsof its evolution.The author- nents (hence the importanceof the conceptsof ecosys- itiesopted to establishaccounts expressed in both physi- tems and cycles)and, most important,with human activ- cal and monetaryunits, which wouldbe independentof ities. The abovecategories are henceforthsupplemented nationalaccounts but connectedto them by variouslinks. by the category of "agent" (individualsor institutions Underlyingthe conceptof an environmentalaccounting using the natural environment)and a summaryclassifica- EnvironmentalAccounting in DevelopmentPolicy: The FrenchExperience 43

Table 7-1. Structure of a Central Account for a Resource Component Initial Potential Development Available Harvestingand Othereffects of 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 Volume of 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 JacquesTheys the accountingsystem should produce an equivalentchange dard nationalaccounts and deal with economicand non- in accountingterms. This interactionis most clearlyilus- economicactivities. trated in the ecologicalsector accounts and linkage ac- In the future these accountswill most likelybe supple- counts,which analyze the relationshipbetween nature and mented by, and connectedwith, social statistics. the components,and agent accounts,which sum up the The flexibilityof 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 rigid systemof accounts.This flexibilityenables resource data to the extent possible.At first glance,this objective managersto remaindirectly involved in constructingsuch wouldseem to contradictthe use of highlydifferentiated accounts. This has been the case in France, where re- physicalunits of measurement(such as surface area, cu- search into methodologyat the central level has been bic metersof wood, numberof species,and tons of coal) combinedwith highlydecentralized practical initiatives. or of qualitativeindicators. This obstacleis partiallyover- come by creating equivalentclasses at the assessment The role of economicassessment. Those for 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 energy and bio- French approachto patrimonyaccounting, which concen- mass equivalentswhen possible.Although this systemhas trates on physicaldata. In fact, these economicconsider- attempted to produce aggregatedata, the concept of a single natural patrimonydevelopment indicator-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 reveal the relationbetween the economicand non- Flexible applicationof the framework. The develop- economic functions of nature, to analyze the circum- ment of central accounts must take into account the stances in whichthese functions are reproduced,and to specificityand complexityof natural phenomena. The determinehow certain underdevelopednatural potential limitationsof an aggregate approach have already been may be transformedinto productionfactors. In a word, shown:in practice it is neither possibleto combinethe patrimonyaccounting is a key tool in assessingthe eco- indicatorsrepresenting each of the three main functions logicalbuilding blocks of developmentand is a represen- nor to compare the measurementsspecific to extremely tation of the conceptof sustainablegrowth. dissimilarcategories of resources(for example,forest ar- * Patrimonyaccounts also have many links or bridges eas and watervolume). Thus, differentaccounts for each with the national accounting system. Agent accounts, of these three functions were created, and data were whichuse categoriesborrowed from patrimonyaccounts, aggregatedonly for the main resourcecategories (such as serve as a system of passagewaysthrough which it is water,fauna, flora, and atmosphere).Consequently, vec- possibleto movefrom classicproduction and consump- tors, not indicators,must be used. Similarly,the objection 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 initiallydecided to confine adionacutsrodexniuesmetoepr letter.For this reason it was initiallydecided to confine and developthe natural environment(satellite accounts). the analysisto a fewpriority sectors (forests,water, soil, * Last, but not least, it must be rememberedthat the land use,land and use, wildlife) andand a fewbasicinteractions.very basicinteractions. 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 standardizationhas been par- natural patrimony.This involves,on the one hand, not tiallyreassessed in favor of differentiatingbetween com- only assessingthe environmentalstock, but also tracing ponent, ecozone,and agent accounts. the damagingeffect of its conversion.On the other hand, * Componentaccounts deal with subsoil assets, the it involvesevaluating the extensionof services rendered soil, the atmosphere,water, and the flora and fauna. by nature. The entire systemis organizedwith reference Materialor energy balances are presented at the begin- to this objective: priority is given to a functional ap- ningor the end of a periodand indicatechanges resulting proach, qualitativeassessments are introducedfollowing fromnature or human activity. physicalanalysis, and aggregateindexes are sought. * Ecozone accounts register the changes in land use andEcoze stacusfcoutsyster. R othehangesing la oduse Thisbeing the case, manyproblems remain unresolved, and the status of ecosystems.Remote sensing methosds patcual in th il fmntr sesetpno areetablih neessar thee to accunts.particularly in the field of monetary assessment. Opinion Arenecssary establishthpesnto pleacunts humaninstit is divided, especiallywith respect to the most suitable Agent,whichac cuntsideal winthpeople andgor f thuaistiu- methodof assigningan economicvalue to resourcestocks: tions,which are classifiedin the categoriesofthestan- using market prices, consideringthe discountedvalue of EnvironmentalAccounting in DevelopmentPolicy: The French Experience 45

Figure 7-2. Links between Economic, Agent, fromthe environmentand the damagesborne by it. Nor- and Patrimony Accounts wegian resource accounting,however, is based on an analysisof eco-energyand materialbalance. This system Economicactivities translates economic activity into flows of matter to energy National Input-outputaccounts and viceversa. The Canadianapproach draws heavily on economic the concept of impact studies and applies them at a accounts Production Consumption macroeconomiclevel. This approachis concernedprimar- ily withthe dynamicof ecologicalsystems that have been

Uses , t Resources disturbed by the economic system.

Typology of relations ____ _ The experience of the Netherlands hinges on the neces- Agent beTvpologyof 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 Norwegianaccounts the aim of attaininga genuine econ- depletion development as access' omyof wealthbased on an assessmentof the potentialities Impacts t (bothmonetary and nonmonetary)of using naturalassets. The approachespursued by differentcountries reflect PatrimonyChanges in resourcestocksseeaplnigccrsadobctv. accounts and environmentalquality several plannng concems and objectives. * To diagnosethe current (or foreseeable)state of the environment(Canada, France, and Norway) * To analyzethe effect of environmentalpolicies (or total anticipatedrevenues and services,or even rneasur- the absence thereof) on economicperformance and wel- ing opportunity or replacement costs. All of these ap- fare (Japanand United States) proaches yielddifferent results, and it is clear that this * To assess the value of resources that can be ex- subjecthas not yet been fullythought out. ploited for developmentas well as the conditionsof their Despite the seeming complexityof the F'ren,chap- regeneration(France and Norway) proach, tangibleresults have been obtained over a fairly * To identifythe possibleoptions among the social, short period and at a relativelylow cost (three staff-years economic,and ecologicalobjectives of 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 resourceaccounting effort so wildlife)and by decentralizingthe data gatheringprocess. far has made it possibleto attain all of these goalssimul- Additionalyears of study willbe requiredto translatethe taneouslyor to coverthe entire range of planningpro- results of patrimonyaccounting into changesin the rela- cesses(as illustratedin Figure 7-3).Moreover, it is diffi- tive price structure of natural resourcesand into mone- cult to imaginea systemcapable of meetingthe needs of tary values.Therefore, in the immediatefuture, the pri- economists,ecologists, the public, decisionmakers,and ority has been given to using component accounts in environmentalmanagers all at the same time. Developing long-termmodeling and to buildingecological sector ac- countriesmay thus have to choose from the variouspos- counts throughremote sensing. sible approachesby referringto their own needs, levelof development,and environmentalmanagement problems. The Experience of France and OtherDeveloped This is discussedbelow. Countries:A Comparisonof Planning Objectives Adapting Environmental Accounts As a conclusionto the first part of this chaptsr, it would to Developing Countries be interestingto situatethe Frenchexperience in relation to the general trend of establishingenvironmental infor- It is no coincidencethat proposals currentlyput formation systemsand to compare the variousapproaches ward about environmentalaccounting are varied. This adoptedin the lightof planningobjectives. On examining heterogeneity simply reflects the varied political con- some of the more representativeprojects, one is struck cerns, institutionalstructures, and problemsin the devel- by their diversity.Each countryseems to haveadapted its oped countries.It also indicatesthe difficultyof findinga environmentalaccounts to its own national needs, insti- consensuson a theoreticalframework that wouldpresent tutions, and culture. clearlythe complex relation between the economyand Americanand Japaneseproposals are 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-regionanalysis is GNPby assessingin monetaryterms the servicesderived calledfor, based on a simplifiedaccounting framework. 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 Impactof Mobilizable Inpt Nonmarket Market service (consumption)o potentials production produiction activities * Human * Economic * Nature * Ecological * Movableassets Imports . _ Social and currency Waste, Absorption * Realand pollution of pollutants On capitalgoods * People 9 Nature Resourcefunctions * Movableand * Economic I \ real goods * Ecological _ . Available Use of * Institutions * Social * publicservices, publicservices (positiveand negative) including Public environmental management services 1 Policies * Plans • Projects o r 9~~~~~~~Incentives Criea and standards evu

Obetiemxmie0Output O b j 'ective:maximize weath-*a goals social,economic, and

|Long-termchoie|| Social | discountrate values l

iVote:Some accounts assess the potentialand stock of resources(such as in Franceand Norway),while others measurethe effectsof environmental damageor improvement(such as in Canadaand the UnitedStates).

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- EnvironmentalAccounting in DevelopmentPolicy: The French Experience 47 tence of a traditionalsector, dominatedby nonremuner- * Because of the highlypolarized nature of develop- ated activitiesincluding self-production, self-consumption, ment, many cases may well warrantlimiting the environ- and barter, alongsidea modern sector, which is highly mental accountingsystem to an analysisof a fewproduc- integrated into the internationaltrade system.To date, tion and consumptionchannels or primarycommodities. populationgrowth and the frequent choice of capital- intensivetechnology have limitedthe capacity of these Physicalproblems and their implications.It wouldbe countriesto absorb the modern sector. inappropriatehere to providea detailed inventoryof the It is thereforethe proper functioningof this traditional environmentalproblems in the developingworld. It is sector (for example,accessibility of local,nonreplaceable more importantto summarizehow these problemsdiffer resources)that ensures the basic survivalof hundredsof fromthose experiencedin the industrialcountries. Envi- millionsof people. The clearest exampleis noncommer- ronmental concernsin the developedcountries have fo- cial energy sources (such as firewoodand refise), which cused largelyon pollutionrisks and the conservationof accountfor 50 percent of the developingworld's energy the naturalenvironment. But despiteextensive local dam- consumption.In the People's Republicof the Congo,for age caused by uncheckedindustrialization or urban ex- example,firewood represents 80 percent of all energy pansion, the greatest environmentalthreat in developing sources and takes up 25 percent of householdbudgets. countries is the disappearanceof the resource base on During the past decade, its price for villageinhabitants which the survivalof millionsof people depends. The has increasedtenfold. problems related to resources include shortages of fire- Third,this superpositionin of heterogeneouseconomic wood and deforestation,deterioration of arable land and systemstranslates directlyinto an enormoussocial and desertification,depletion of the quality and quantity of geographicalinequality. Public works projects, recently water and the prevalenceof waterbornediseases, reduc- constructedmodern industrial complexes, and rapid urban tion in genetic diversityand wildlifestock (wildand do- expansionare so many enclavesof modernity,which at mesticated, including fishing resources), and damage times stand in strong contrast to the rest of the country. causedby natural disasters. The growingdisparities in income,consumption patterns, These problemstend to overlapinto a chain of cause and lifestylescall into question the usefulnessof tradi- and effect, which makes partial approaches of limited tionalstatistical assessment methods based on averages. value. Disturbancesin the hydrauliccycle, for example, A finalfactor specificto developing-countryeconomies may be related to erosion, which is in turn linked to is their dependenceon the outside world. This has also deforestation.The destabilizationof ecologicalsystems had considerableinfluence on the introdLictionof envi- may also be linkedto povertyand inequality,the popula- ronmentalaccounts. On the one hand, the importanceof tion explosion,legal systems,dependency on 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 situation has severalimplications for establishing sectors producing directly for the domestic market, accounts. sharplyreduce the effectivenessof 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 cannotfulfill their traditional countries. role as indicatorsof scarcity. * An accounting system will be even more advanta- TheeasThnereare ar severals implicationsipslcar s ofo theset economic Issues geous if it reflects the systems' effects and cyclical phe- for environmentalaccounting. nomena. * Although the nomenclature of natural resources * There is no doubt that the assessmentand develop- seems easilyadaptable to the specificcontext of development of natural resource potential can have both an eco- ing countries, the categorization of agents should be care- nomic and ecologicalinterest for developingcountries, fullyreviewed and, if necessary,revised. providedthat it leads to the formulationof aggregate indicatorsand coversboth commercialand noncommer- AvailableInformation cial resources(see also Peskin,Chapter 10). * Given the poor representativenessof monetary as- The high cost of compilingnew data and the chronic sessments,it is necessary,at least initially,to concentrate lack of qualifiedpersonnel in the combinedfields of sta- on physicalaccounting. tistics and the environmentmake it difficultin the short * The existence of extreme inequalitiesor different term to prepare resource accounts in developingcoun- situationsrequires the creation of separate accountsfor tries. Gatheringinformation on the environmentis gen- each homogeneousgeographic region or population erallynot yet a priority concern for statisticiansin these group. countries. In these circumstances,it is therefore likely 48 JacquesTheys that environmentalaccounting will in the short term ei- marginalsettlements in rural or urban areas. Generally ther be based on existingdata alone or depend on statis- speaking,existing data are often not sufficientlylocalized tical programs already envisaged in other fields. This and are discontinuousor isolated. Once again, they are restrictionmakes it strategicto establisha preciseinven- gatheredby a host of independentagencies, which fail to tory of all currently availabledata (mapping,scientific, circulatetheir findingsamong themselves. 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. Assessmentsof dresseditself to this task by 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 (United Nations 1982). a major project is implemented.Purely economic esti- The main problems found were dispersedand compart- mates most often remain confinedto the university(at mentalized data, insufficientspecific information, ex- least at a global level),and studiessumming up environ- tremely uneven quality of nonspecific data, and over- mental expenditure at the national level are extremely general statistics prepared by international agencies. rare. Finally-and most significant-qualitativedata are Theseare discussedbelow in turn. virtuallynonexistent.

Dispersedand compartmentalizeddata. Somedata on Unevenquality of nonspecificdata: abundant but not the environmentalready exist in the developingworld. directlyusable. The observationabove leads to a simple These data, however,have been compiledby a widevari- conclusion:the feasibilityof environmentalaccounting in ety of differentagencies, ministries, scientific institutes, developingcountries will depend primarilyon the ability business firms, and internationalorganizations and are to adapt data originallycompiled for other purposes or scattered and diversified.Usually appearing as by-prod- to use existingstatistical infrastructures to 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;employment and individualobservations on 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- institutionsproducing them, these data are neither stan- tilizer and pesticides;quantity of timber and forestprod- dardized, centralized,nor even widely disseminatedor ucts for export; catches of fish; and construction of published.Thus in Thailand, more than eighty different permanentdwellings. bodiesproduce environmental data, whichuse frequently Through a few relativelysimple operations, such as incompatiblenomenclatures and formats.Forty-five such geographiccoding of data or the use of other data (for institutionsexist in Kenyaand thirty-eightin 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 environmentalaccounts might be obtained, and an envi- an environmentalor resource account could representa ronmentalsection could graduallybe added to some sur- decisivestep forward,even if it werelimited to creatinga veys. minimum of harmonization-and thus economies of Naturally,the success of patrimonyaccounts depends scale-betweencompeting data systemsand to servingas on the qualityof their connectionwith the SNA, whichhas a meetingground where data producersand users-who the tremendousadvantage of havinga homogeneousand otherwisehave little contact-could meet. consistentframework and of being appraisedannually in most countries.National accounting is a necessarytran- Insufficientspecific data. Some progressin collecting sitionpoint, particularlyif environmentalaccounts are to data has been made during the past years. Severalcoun- be used in national economicplanning. There are two tries nowpublish reports on the state of the environment. limitationsto this approach,however. Monitoringnetworks have been establishedto analyzeair First, it is clear that considerablegaps exist in the and waterpollution from a fewstandpoints. Remote sens- statistical material compiled-even at the purely eco- ing is now being used systematicallyto observechanges nomiclevel. For example,very little aggregated data exist in soil use. At the instigationof the Economicand Social on householdspending and consumptionor on income Commissionfor Asiaand the Pacific,pertinent data have distribution,and informationrelating to 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 significanceof accounts is one of the more advancedAfrican countries, statistical and the use of aggregatesas overallindexes of activity data are still inadequateon such important phenomena are considerablyreduced by the fact that they do not as deforestation,air and waterpollution, soil erosion,and include nonmarketgoods and services. Gunnar Myrdal EnvironmentalAccounting in DevelopmentPolicy: The FrenchExperience 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 limitations explain 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 environmental accounts, 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 international 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 network to oversee climate, long-range transport of pollut- Although these obstacles may seem sizable, they are ants, environmental health, 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

Severalfactors can possiblyfacilitate the setting up of * In the poorest countries,priority shouldbe givento environmentalaccounts in the developingcountries: their preparing reports on the state of the environment(add- environmentalproblems may be more apparent than in ing, where appropriate,a survey of investmentexpendi- the industrialcountries, the convergenceof requirements ture). for economicand resource statisticsmay be more obvi- * Patrimonyaccounts should be developedonly in the ous, and the intermediatematerials and results of the economicallymost advanced countries and should em- developedcountries can be used. phasize accountingin physicalterms before contemplat- In addition, remote sensing is an effective,well-devel- ing linkageswith the SNA. oped tool. It is particularlywell adapted to evaluating * Data collectionand processingshould initiallyfocus naturalresources, and, havingdemonstrated its reliability, on one or two resources regarded as economicallyand remotesensing can be an extremelyuseful tool in creat- ecologicallystrategic by each country. ing environmentalaccounts. * The national (macro) and regional(major projects) * It is relativelyinexpensive compared with other meth- approachesshould be combinedas far as possiblewithin ods of statisticaland cartographicalanalysis. 3 the frameworkof flexibleand decentralizedinstitutional * Its globaland compositenature allowit to analyzea machinery,which willdraw maximumbenefit from exist- large numberof variablessimultaneously, thus furnishing ing skillsand information. qualitativeas wellas quantitativeresults. At the InternationalLevel * It makes it possible to process rapidly large and 4 inaccessibleareas. As was the case when the SNA wasestablished, interna- * It is particularlysuitable for repeated use, whichis tional cooperationwill undoubtedly be necessaryto help importantin takingperiodic measurements of differences initiate the process of creating environmentalaccounts. in the state of the environment. The followingsix proposalsfall withinthat context. To date, there are no examples of natural r esource * A detailedsurvey should be made of the cost, logis- accountingprojects carried through to completionin de- tics, human resource requirements,and performanceof velopingcountries. However, significant progress has been accountingsystems being set up in the developedcoun- made withthe launchingof a fewpartial efforts under the tries. At the same time, an audit on the reliabilityof auspicesof the U.N.Statistical Office (uNso), UNEP, and remotesensing methods could be carried out. 5 EScAP, and on the initiativeof individualcountries. * Full-scaleexperiments should be funded in a few Cote d'Ivoireis a good example,as it began research countries(one per continent),which focus each time on in 1983 with a view to setting up a quantitativeand a differentaspect that is locallyconsidered to have prior- qualitativesoil account (Dravieand others 1983).Within ity. a few months,it establisheda methodologicalframework * Specificimprovements in existingstatistical systems and appliedit to a smallregion, which permitted full-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 classificationsystem (functional and ecologicalzoning patterns, compilingeconomic data per- qualitative)was created. Second, a central account was taining to environmentalmanagement in a single com- set up, whichdescribed both the changesin land alloca- pendium, or adding a section on the environmentor tion and the evolutionof its potentialuse by phenomena natural resourcesto industrialand agriculturalsurveys. such as erosion, desertification,and certain agricultural * An internationalnetwork should be establishedto practices.Third, an economicaccount was established, facilitatethe disseminationof the results of successful which coveredboth the investmentcost involvedin soil experiments,the exchangeof viewsand intermediatema- protectionand improvementand the monetaryeffect of terials, access to data collectedby internationalorgani- the growthof potentiallyexploitable assets (taking into zations, and the creationof a file of cost-benefitstudies. account theories on production techniques).Full-scale * Trainingprograms should be developedfor the stat- compilation of statistics for these accounts must, of isticians, economists,and scientists involvedin the ac- course, be started before any conclusionsmay be drawn countingsystems process, or trainingmodules should be fromthis project. created to make national accountantsand planning offi- cialsmore aware of the importanceof environmentalaccounting. 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 EnvironmentalAccounting in DevelopmentPolicy: The FrenchExperience 51 model transposableto all the developingzountries, but willbe possibleto attain all these objectiveswithin two to launch a process of implementationthat takes into years. accountthe assets and constraintsspecific t:o each one of them. It is thus necessaryto go beyonda list of desirable Second Stage: Development activitiesand to propose a program with very specific stages and time scales. The second stage should have two objectives:on the The followingprogram proposes a series of steps in one hand, to extend the precedingsteps so as to include three stages(short-, medium-, and long-term),whose main fewereconomic aspects and, on the other hand, to set up aim is graduallyto arouse in the developingcountries the essentialinstitutional structures in each countrycon- concerned sufficientmotivation to proceed to the final cemed. The expertsshould thus be graduallyreplaced by stage of creatingaccounts. nationalbodies. The followingactivities could thus be carried out dur- First Stage:Awareness and Experimenta,tion ingn thishsseodsae second stage. The aim of the first stage is to interestplanning officials * The setting up, in each of the countries in which a (and beyondthem, politicaldecisionmakers) in creating pilot study wasdone, of institutionalstructures responsi- accounts as soon as possible.The stress is thus deliber- ble for the accounts(Figure 7-4). 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 AlternativeDevelopment Scenarios countries and from the developedcountries who have experiencewith environmentalaccounting. Initially each Valueand sustainability study would prepare a central account (stock account) ofthe project for one of the resourcesconsidered to 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 modificationsin the economicvalue of the stock at the beginning and the end of the period under consider- Ecological Social ation. It willbe possibleto test severalmethods of mone- functionof 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 (quantityand 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 fieldwork is 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 completesystem of accountson * Development,where possible, of prospective and the resourcesstudied during the first stage. This is equiv- macroeconomicmodels for assessing,on the one hand, alent to adding to the preceding analysisa satelliteac- the economiceffects of environmentalpolicies and, on count summingup the expenditureon the management the other hand, the consequencesfor the main ecological of this resource,a set of agent accounts,and, in particu- indicatorsof differentgrowth scenarios lar, the bulk of the data on the ecologicalfunction of the * Launching, on the basis of the preceding informa- resources(accounts and indicatorsof defectsin ecosys- tion, of a limitednumber of cost-benefitstudies on poli- tems). This wouldbe done by the institutionalstructures cies for combatingconditions such as desertification,de- describedabove. forestation, and water pollution (in accordance with * The launchingof internationaltraining and research nationalpriorities). activities. At the end of this period four or five complete ac- In the othercountries or on an internationallevel counts, each dealing with a specificresource (such as water,soil, or forest),would thus be available.This should * Preparationof an international-leveltypical account sufficeto test the validityof the indicators,ratios, or units structure adaptedto the developingcountries and of the of economicand ecologicalmeasurement suggested in correspondingmethodological documents, such as guide- eachcase. lines and intermediatematerial Concurrentlywith this detailed analysisof a resource, * Adoptionof an internationalclassification system for it would probablybe desirable to use the availabledata resources (such as water, air, soil, and ecosystems)and to set up in four or fivevolunteer countries a provisional effortsto harmonizeexisting nomenclatures systemof indicatorsof situationor of results for the other * Improvementof the methodsof storing and dissemi- nationalresources. All this materialshould finallyenable nating the data collectedby the internationalagencies to an increasingnumber of countriesto become aware of make them more coherent and directlyaccessible to the the relevanceof accounts before the third stage, which developingcountries should consist of applying the pilot experiments on a * Launchingof a majorinternational research program large scale. on indicatorsof defectsin ecosystems(analysis of thresh- olds) and on resource economics(economic assessment Third Stage:Dissemination of damage,calculation of shadowprices, and criteria for the interperiodmanagement of renewableand nonrenew- Untilthe programis about to enter its fifth year, it will able resources).This researchfocuses on the problemsof not be possibleto appreciatethe relevanceand feasibility the developingworld and willhave to take explicitlyinto of environmentalaccounting in the developingworld and accountthe nature of the availableinformation. to arrive at seriousconclusions regarding the accounting In conclusion,it is necessary to 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 assess and adjustthe programof has no chance of succeedingunless it corresponds, at action.The followinglong-term actions could eventually be leastto beginwith, to specificpolitical needs withrespect launched,depending upon the resultsof this conference. to management,and unless it givesbirth to a permanent frameworkfor dialoguebetween the responsiblegovern- In countriesthat initiatedpilot experimentsduring the ment departments,scientists, economists, planners, and first two stages statisticians.Methodological problems are of secondary * Progressiveextension of accounts establishedfor a importancecompared with these necessities. single resource to the totality of the natural resources (patrimonyaccounts) and of the expenditure on their Appendix. Nomenclaturesof the French Natural management(satellite accounts) Patrimony Accounts * Simultaneousorganization of existing information systems(such as data banks, monitoringnetworks, sur- A. Nomenclatureof components veys,and inventories) 1. Nonrenewablecomponents * Introductionin planning of a limitednumber of ag- Fossilfuels gregate indicators of the state and development of re- Uranium sources, which are followedup periodically(and estab- Metalliferousore lishedon the basis of the accounts) Nonmetallicore * Discriminatinganalysis of the possible linkups be- Quarry(including sand) tweenresource accounts and nationalaccounts Other EnvironmentalAccounting in DevelopmentPolicy: The FrenchExperience 53

2. Environmental media in monetaryterms all stock or capital goods held by eco- Soils (exposed and immerged) nomicagents (such as housing,capital equipment, 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 photomappingusing color infrared. 3. Living organisms 4. For example,only 40 Landsatimages were neededto estab- Animal species (wild and domestic)-according lish a 1982-83 inventoryof terrestrial resources for half of to standard scientific nomenclature Mali,whereas the same area wouldhave required 5,000 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 environmentwith a sectionon resourceaccounting, based on one or two case studies. B. Nomenclature of ecosystems 1. Water ecosystems References Open sea Coastal ecosystems de Jouvenel,Bertrand. 1966."Proposition a la Commissiondes Inland ecosystems Comptesde la Nation."Ministere des Finances,Paris. Pro- 2. Terrestrial ecosystems cessed. Forest Dravie,Christophe A., 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 (Economicand Social Commissionfor Asiaand the Pa- Pioneer ecosystems cific).1982. "Reviewand Appraisalof EnvironmentalSitua- 3. Other ecosystems tion in the ESCAP Region."Bangkok. Processed. JARIW-ECA(International Association for Researchon Income C. Nomenclature of agents and Wealth-EconomicCommission for Africa).1982. Record According to the traditional distinction of the SNA of the regionalAfrican conference, November 15-20. Vol.11. among: Douala,Cameroon. Processed. Households InstitutNational de la Statistiqueet des Etudes lconomiques Business firms (INSEE)et Ministerede l'Environnement.1986. LesComptes Administrations du PatrimoineNaturel-La DocumentationFrancaise. Paris. Other (such as foreign entities) Myrdal,Gunnar. 1970. The Challengeof WorldPoverty. New Other subcategories: York:Random House. Business: environmental firms or managing bodies Rapport,David, and AnthonyFriend. 1979."Toward a Compre- (agricultural and nonagricultural) hensive Frameworkfor EnvironmentalStatistics: A Stress Administrations and environmental public bodies ResponseApproach." Statistics Canada, Ottawa. Processed. (associations, local administrations, and central UnitedNations. 1982. Survey of EnvironmentStatistics: Frame- administrations work, Approaches,and StatisticalPublications. Statistical Papers,series M, no. 73. NewYork. Notes UNEP (United Nations Environmental Programme). 1981. "Earthwatch: An In-depth Review.Environmental Data." 1. The term "patrimonyaccounts" is a direct translationfrom eport 1. Nairobi.Processed. the French language.The French systemis very broad and Weber,J. L. 1983. "The French NaturalPatrimony Accounts." includes,in additionto natural assets,those witha historical StatisticalJournal of the UnitedNations Economic Commis- or culturalvalue. sion for Europe1:419-44. 2. Economicpatrimony accounts have been prepared since World Bank. 1981. AcceleratedDevelopment in Sub-Saharan 1986within the frameworkof the expandedSNA. Theyassess Africa:An Agenda for Action.Washington, D.C. 8

Linkagesbetween Environmental and NationalIncome Accounts

Richard B. Norgaard

Almostfour decadesago K. WilliamKapp (1950) argued users of informationfrom the SNA, as advisersto devel- that both our conceptionof the developmentprocess and opingcountries, and as coordinatorsof systematicdata our nationalincome accounts were inadequateior devel- collectionand exchange-have initiatedvarious efforts to opment planning.Neither our theories nor our primary improvethe usefulnessof environmentaldata. The Con- indicatorsof economicdevelopment incorporate the serv- ferenceof EuropeanStatisticians of the EconomicCom- ices of the environmentand of resources.This conceptual missionfor Europe began to investigatethe organization problembecame a popularconcern during the 1.960s,as and use of environmentaldata in 1973. awarenessof pollution and environmentalmar,agement The U.N. StatisticalOffice (uNso) began working on problems increasedin the developedcountries, By this the problemsof organizingenvironmental data in 1974. time the shortcomingsof the grossnational product (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 Developmentof EnvironmentStatis- sources faster at the expense of future generations. It tics." could also be increasedboth by degradingthe environ- The EnvironmentalAccounting Workshops have strug- ment and by correctingenvironmental degradation. gled with the complexmethodological issues of how vari- Duringthe 1970seconomists and others beganto 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 informationprovided by the SNA. Strong the logic behind many recommendations,however, the arguments,presented predominantly by economists,have onlysuggestion that manycountries have adoptedin their been made that the SNA is already an effectivetool. Its national accounts is to keep separate track of environ- defendersbelieve that it simplyneeds to be improvedby mental correctionexpenditures (named defensiveexpen- includingboth the value of environmentaland 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 environmentalsystems in lems in developingcountries also have been linked to the capitalaccount Someeconomists believe that appro- inadequateconsideration of environmentaland resource priate techniques exist to fully incorporate critical re- factors. Both specificdevelopment projects and general source and environmentalvalues in the SNA. Others be- strategies failed to reflect environmentalopportunities lieve that environmental accounting should be and constraints.In the early 1970s the politicalleaders, independentof economic accountingand that linkages governmentadvisers, and academicsin developingcoun- should be made betweenthe accountsas appropriatefor tries rejected the concept of an environmentalcrisis as differenttypes of questions. perceivedby their counterparts in developedcountries. Economistshave developednumerous techniques dur- Duringthe past decade,however, some of them havebeen ing the past three decades for estimatingthe monetary active in reformulatingdevelopment thinking to include valuesof resourceand environmentalservices. The values the relationshipsbetween well-being,environment, and of the environmentsor environmentalfactors and of the resources. resourcesfrom which these servicesderive are the pres- The internationaldevelopment organizations-as major ent valueof the services.Economists have tried to ground 54 Linkagesbetween Environmental and NationalIncome Accounts 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 included and econometricprocedures.' To most economists,environ- how.Thus, the SNA is based on conventionsestablished mental and resourcevaluation is a provenarea, one where through a process of acquiring consensus rather than success appears consistentlypossible after sufficientef- basedon proceduresdeduced fromeconomic theory. fort. Thus most economistsconcerned with environmental accountingargue that the greatest problems of the The Value Aggregation Issue SNA with resources and environmentalsystems can be correctedby developinga good systemof accounts,with Muchof the interestin environmentalaccounting stems everythingmeasured and aggregatedin monetaryterms. from a concern with the sustainabilityof development. Furthermore, with everythingin monetary terms, plan- Economistsargue that sustainability,to the extent that it ners could readilycompare options. is important to people, is incorporated in individuals' The skepticsare concernedwith the limitsof economic values and reflected in the decisions they make. For valuation or of any other single technique. They argue economists,one goal of environmentalaccounting is to that the environmentalaccounts should be maintainedin provideappropriate indicators of people's willingnessto physicalunits to the extent possible and thait multiple maintain or improvethe quality of the environmentas approachesto linkingaccounts with the SNA should be developmentoccurs. Valuation techniques for 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 markets that are working. that questionsrelated to appropriatedevelopment are too Environmentalistsargue, however,that they are ethi- important, diverse, and complicated to be pursued cally compelled to seek sustainable development. For through a single approach. But they have so far not these people,sustainability should be a constrainton, or reacheda consensuson an alternativeapproach or com- separatesocial objective of, developmentstrategies. Even binationof approaches.2 if a societydoes not select sustainabilityas a constraint The methodologicaldebate has circledaround the ec- or objective,it should explicitlymonitor the extent to onomic approach versusthe use of diverse,less formal, which current preferencesjeopardize future generations. methods.Many of these other methodshave been exper- Economictechniques, however,aggregate key environ- imentedwith in the French systemof envirornmentalac- mental informationof importanceto socialdecisionmak- counting.3 A consensus,however, has hardly developed ers and considersocial values by initiallyweighting them on which methods might be conceptuallymc,re suitable with respect to individualpreferences as they are ex- or practically more effective under different circum- pressed in privatemarkets. stances. Economistsmake tradeoffsbetween generations on the assumptionthat 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- markets providesa clear rationalefor social intervention creasing the GNP means that the economicwelfare of in capitalmarkets and independentsocial decisions about peoplehas improved.But GNP only measuresthe levelof conservingresources and environmentalsystems. Socie- economicactivity that 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 make decisionsto directlyreserve resourcesand environ- areas under demand curves and above supply curves. mental systemsfor future generations. The information When these areas increase,other things held equal,wel- for makingthese socialdecisions should not be presented fare has improved.Expenditures are an awkwardcombi- solelyin a formreflecting the currentgeneration's values, nation of the cost of supplyinggoods and servicesand as expressedindividually by the rate of interest generated the producers'surplus. And other things are rarely held in capitalmarkets. equal. GNP increaseswhen subsistencefarmers join the Althoughthe issue of sustainabledevelopment is rela- labor force and stop producing their own food, when tivelynew, the philosophicaldivision between thinking of womenjoin the labor force and hire domestichelp and socialgoals as the sum of the goalsof a society'sindivid- childcare, when the stock of housing and factories is uals and thinkingof societyas havingits own goals above destroyedby war and then replaced,and when the envi- and beyond those of its individualshas deep historical ronmentdeteriorates and the governmentinitiates correc- roots. Economictheory is based on the former premise, tive actions. but all societiesoperate on the second premise to some The SNA has these internal inconsistenciesbecause of extent, mostto a considerableextent. In the publicpolicy the difficultiesof buildingaccounts that are consistent arena, economistsare repeatedlyconfronted by the con- 56 RichardB. Norgaard tradictionsbetween the premiseupon whichtheir indica- Economictechniques for valuingnonmarket goods and tors are basedand the premiseupon whichthey are used. servicesare also based on the assumptionthat nonmarket The ethicaldebate has theoreticalanalogs. The contra- goods are a marginalproblem. If nonmarketgoods and dictionsbetween economic indicators based on one prem- servicescomprise a small portion of the total economy, ise about societythat are used in publicdecisions involv- then the inclusion of these goods and services in the ing anotherpremise underlie, for example,the theoretical market wouldnot significantlychange the relativeprices controversyover the use of benefit-costanalysis to effi- of goods and servicesor individualbehavior. In this case, cientlydesign public projects. If one of the objectivesof 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 efficiencyanalysis derived from valuations market goods and servicescomprise a large portion of basedon prices generated by the existingincome distri- the total economy,however, their inclusionwould signifi- bution?The weightingof benefitsand costs dependingon cantlychange relative prices and the valuationof nonmar- their incidenceby incomegroups is currentlypracticed, ket goods and services. Again we are faced with the but it is quite controversialamong economists because of dilemmathat economictechniques are more appropriate the valuejudgments it involves. the less significantthe problem. And again, advocates With respect to sustainability,the parallelsare clear.If and opponentsof the economicapproach are dividedas one of the objectivesof public decisionmakingis to en- to whetherour problemsare small or large. hance the likelihoodof sustainabledevelopment, what is The economicapproach suffers from several theoretical the significanceof environmentalvaluations derived from shortcomings.One mightconclude therefore that another informationgenerated by an economythat is less sustain- approach is needed. But all approaches contain similar able than desired?Within environmental economics simi- methodologicaldrawbacks. Any method of aggregating lar questionsare now being theoreticallyconsidered by environmentaland resource data, for example, implies comparingtotal systemswith and withouta policychange. value weightingswhich "should" be made by society.Yet Usingthis approach,the valuesof environmentalservices societyas a whole cannot be involvedin everydecision. are derivedfrom the differencesin utilitygained with and Some method of weightingis necessaryso that those to without the policy change. This theoretical "solution" whomsocial decisionmakinghas been delegatedcan as- reversesthe process advocatedby economistsfor environ- sess current conditions,foresee the consequencesof al- mentalaccounting: environmental values change as a re- ternativecourses of actions,and make decisions.Indeed, sult of the policyinput rather than environmentalvalues even if all decisionswere made collectively,aggregation- providinginput to the policychange. with implicitvaluations-would be necessaryto convey The determinationand use of interestrates reflectsthis informationin a usableform to the public. This issue is theoreticalquandary. Economists argue that the value of beingreferred to as the value aggregationproblem. resourcessaved for the next generation,say twentyyears The value aggregationissue can be used to reduce the hence, is equal to their value at that time discountedby methodologicaldebate to an ethical debate, with each dividingthe value by one plus the rate of interest to the side leaving the proponents of the other methodology twentieth power. Given the economist'stheory of how with little more than their valuessupporting their argu- interest rates are determinedin intergenerationalcapital ment. But one can look at the issue also in the following markets,however, it would be just as appropriateto ask constructive way. Each methodology gives different how future generationswould interact differentlyin the weightsto the valuesaround whichinterest groups organ- capitalmarket and affectthe rate of interest if they were ize. With multiple methodologies giving alternative wealthierbecause this generation had redistributed re- weightsto differentinterests, the interests of all could be sources in their favor. protected and a Pareto optimal solutionmight be possi- The conventionaleconomic answer to this issue has ble.4 The valueaggregation problem in this light becomes been to argue that market values with and without a an argumentfor methodologicalpluralism-for the use of policychange will be veryclose for small changes.This, multiplemethodologies to help insure that all valuesare however,would be incorrectif the ultimateobjective were respectedto the extent possible. to significantlychange the direction of development.In short, if the currenteconomic development path wassuf- The Bounded-KnowledgeSynthesis Issue ficientlyinappropriate that significantcorrections would be calledfor, current market signals would not provide All models of social and environmentalsystems suffer appropriate indicators of how the path could best be from another problem. Scientificknowledge stems from corrected. Signalsgenerated by economicmethodology specificmodels that simplifyreality, in part, by artificially are best for fine-tuningon the margin.Quite consistently, boundingthe field of study.Science has not provideda supporters of, and detractors from, the economic ap- wayto synthesizebounded knowledgeinto knowledgeof proach tend to hold differentopinions as to whetherfine- the whole.Yet such a synthesisis exactlywhat environ- tuningsor significantchanges are needed. mental accountingneeds in order to derive better indi- Linkagesbetween Environmental and National Income Accounts 57 cators for planners.This problem willbe referred to as the complexinteractions between economic development the bounded-knowledgesynthesis issue. and the environment.5 The value aggregation and Each methodologyfor aggregatingbounded knowledge bounded-knowledgesynthesis problems indicate that this works better for some types of knowledge,less well for beliefis naive.A consensusfor one methodologycan only others. Preferencefor one methodologyover another fre- be reached by "nonlogical"means. Logic,however, indi- quentlystems from an individual'sspecial understanding cates that multiple methodologies-conceptual plural- of a particularaspect of a problemand relativenaivete of ism-providethe key to a safer and more pragmaticstrat- other aspects. Dependingon the question being asked, egy for linkingenvironmental and economicaccounting. somelinking methodologies will be ableto addressknowl- Sustainabilityis too important,too multidimensional,and edge more closelyrelated to the question than others. too poorlyunderstood for societiesto rely on one meth- One procedure,for example,might effectivelyaggregate odology. soil fertility with economic productivity,while another might aggregatethe abilityof the soil to hold moisture Conclusions during droughtsto the variationsin the need lbr foreign exchange.Each methodologyfor aggregatinghas advan- The approachto combiningenvironmental information tages dependingon the questionbeing asked. with the SNAfaces certain difficultiesbecause of the deri- The bounded-knowledgesynthesis issue also supports vationof the SNA(by consensusrather than a deductive a pluralisticapproach to aggregatingenvironmental and methodology)and its attendant shortcomings;the value- economicinformation. The rule of "safety first" would aggregationissue; and the bounded knowledge-synthesis indicatethe use of multiplemethodologies to insure that issue. decisionmakershave information alerting them to as many The existence of these problems means that broad, aspects of environmentaland resource phenomena as aggregateindicators for planners willhave to be derived possible.Decisionmakers should not be limitedlto knowl- by consensusrather than by a deductive methodology. edge boundedby the particularmodels best addressedby Each specificapproach advocatedby one group can be one linkingmethodology. Planners and policymakersdo shownto containshortcomings or inconsistencies.There not alwaysknow which questions should be asked and is therefore a need to pragmaticallywork toward a con- whichmethodologies are most appropriate. sensus. Althoughno one methodologycan be logically The valuationof environmentalservices and resources correct,the use of multiplemethodologies will reduce the and of their respectivesystems and stocks is a methodol- likelihoodof makinga significanterror. ogy that facilitatesnothing more sophisticatedthan addi- In conclusion,less effort shouldbe spent on debating tion. Market goods and servicescan be combinedwith and more on experimenting,learning through doing, and nonmarketenvironmental factors after valuationto obtain sharingexperiences. It seems appropriateat this stage to better measures of the level of economicactivity. Simi- try two or three different approachesto environmental larly,the valueof natural resourcestocks and of environ- accountingin each of four or fivecountries with different mentalsystems can be added to that of man-madecapital. types of environmental problems. Future workshops If better measures of the levelsof economicactivity and shouldbe directed towarddiscussing the practicalissues the valueof assets are needed,valuation is an appropriate encounteredand sharingthe results. approach. Policymakersand plannerswant to knownot only how Notes wellthe economyis doingbut how it mightbe improved. For this they need to be able to predict the cutcomesof 1. For a generalreview of and guideto the use of these alternativedecisions. And predictionsrequire models of techniques,see Hufschmidtand others (1983). Much of the cause and effect-of how different mixes of economic theoreticaldevelopment ofthese techniques has beenpublished activity affect, and are affected by, resources and the in the Journalof EnvironmentalEconomics and 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 welldocumented in 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 French systemof environmentallinking, for example, and environmentaa mapise planning, V. n has manyattractive features, but those opposedto the econo- cand environmentl planninga m is neededt. Valuation mists' view cannot agree on its strengths and weaknesses. can still be helpful when combinea with explanatory mod- Chapter7. See els, but for most questions valuation itself is inadequate. 4. A Pareto optimalsolution is one in whichsome or many In summary, the theoretical component of the debate individualswould be better off and, at the same time, nobody over the appropriate methodology for combining environ- wouldbe worse off. 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 dominantbelief among scientists,economists, and policymak- Hufschmidt,M., D. E. James,A. D. Meister,B. T. Bower,and J. ers. The belief is supported, although not "logically,"by the A. Dixon. 1983. Environment, Natural Systems, and- mainstreamepistemology of Popper (1979). During the past Development:An Economic ValuationGuide. Baltimore, Md.: decadethe dominantbelief system has been attackedby philos- Johns HopkinsUniversity Press. ophers (Feyerabend 1974 and 1978), by systems theorists Knapp, K. William.1950. The Social Costs of PrivateEnter- (Churchman1979), and by planners(Ulrich 1983). prise. Cambridge,Mass.: Harvard University Press. Peskin, Henry M. 1981. "NationalIncome Accounts and the Environment."Natural Resources Journal 21 (uly):511-37. References Popper,Karl. 1979.Objective Knowledge: An EvolutionaryAp- proach. Revisededition. Oxford, U. K.: Oxford University Churchman,C. West. 1979. The Systems Approach and Its Press. Enemies.New York: Basic Books. Ulrich,Werner. 1983. Critical Heuristics of SocialPlanning: A Feyerabend,Paul. 1974. Against Method. London: New Left New Approach.Bern: Paul Haupt. Books. UnitedNations. 1984. A Frameworkfor the Developmentof . 1978. Science in a Free Society. London: New Left EnvironmentStatistics. Statistical Papers, series M, no. 78. Books. NewYork. ______9

Environmentaland Nonmarket Accounting in DevelopingCountries

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 why they engaged in nonmarketaccounting. How- stage of development.The United Nations encourages ever, since only a dozen of the 150 nations classifiedas standardizationboth in accountingprocedures and in the developingdisplay the 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 measures of economic performance could argue, however,that there is a special need to than on building better data systems (Blades 1975, p. depart fromthe standardin developingnations. In partic- 406). The concern that neglectingsubsistence economic ular, they may benefitmore than developednations from activity causes total economic activity to be underesti- modificationsthat better accountfor the coniributionof mated seems well justified. Of the forty-eightsurveyed environmentaland other nonmarketassets. countriesthat were able to determine the 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,nineteen estimated that these activitiesaccounted amount of economicactivity that 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 accountants in these countries. Acccrdingto a Bladespoints out, many nonmarketproduction activities surveyconducted by the OECDDevelopment Centre, most are not accountedfor at all. For example,most countries of the sixty-fiveresponding nations accountl:o some de- surveyeddid not make an estimate for food processing, gree for nonmarket,subsistence activities (Blades 1975). handicraft,construction, water portage, and transporta- There is no evidence,however, that any of these nations tion activitiesin the householdsector. accountfor the servicesof the environment,the principal The OECDsurvey does not indicatewhether any 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 how a system of national action ofthe servicesof the environment.To myknowledge, counts, possiblydeveloped along the lines of the frame- no nation, developedor developing,has adopted formal work described in the next chapter, could better serve accountingfor the servicesof the environment,although the needs of developingnations. Certainimplementation in recent yearsthe U.N.Environment Programme (UNEP) problems specificto these nations are discussedand a has been attemptingto determinewhat recommendations courseof action suggested. should be made to member nations along these lines. UNEP and the World Bank are concerned, with some Uses of Expanded Accounts justification,that neglect of environmentaldeterioration, in Developing Countries and especiallydeterioration of the stock of natural resources, willgive a false picture of economicgrowth as In developingas well as developedcountries, 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 economicperformance and to organize data 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 generatedeficient indicators of economicperformance in output prices willnot measure true socialbenefits. Given developingnations, perhaps a more important reason is this well-knownresult from economic theory, development their neglectof the deteriorationof the stock of natural economistshave attempted to construct shadow cost or resources and environmentalcapital. This neglect has price measures,which either supplement or replace the receivedmuch recent attention because of the failureof conventionalmonetary measures. 3 It seems, however,that developmentpolicies to generatesustained growth. much more attention has been directed towardthe bene- Historically,overlooking declines in the stock of natural fit side than the cost side, even though theory suggests resourcesin the conventionalaccounts was thought to be that observedcosts and pricesfail to adequatelymeasure of littlesignificance. This viewwas basedon the fact that valuesfor reasons that are just as applicableto costs as discoveriesof 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 devoted to 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, when there is a large degree of non- (Landefeldand Hines 1982).2The current perception, market activityin an economy,monetary measures can however,is that discoveries,recharge, and naturalgrowth be just as deceivingfor estimatesof true opportunitycosts are not keeping up with depletion.Moreover, for stocks as they are for estimates of social values or benefits. of such environmentalcapital as clean water, clear air, Moreover,rectifying the problem can be just as difficult. and natural forests,the potentialfor new discoveriesand There is, in fact, no easy quickfix. Althoughthe literature rapid increasesin growthappear slim indeed. Therefore, impliesthat correct cost estimatescan be made by adjust- as long as maintainingthe stock of these resources is ing the observedvalues, determining the appropriatead- consideredessential to sustained growth in developing justment factors is no easy matter (Little and Mirrlees nations(an assumptionexamined in the next section),the 1969). For many years, the planning professionhas rec- neglectof their deteriorationin the accountsis especially ognized that the analysisof complexeconomic interde- serious. pendenciesrequires some type of interindustryor activity With respect to the second traditionaluse of national analysis.One of the most importantcontributions of con- accounts-a frameworkfor the consistent assembly sf ventionalnational economic accounting has been its abil- economic data-conventional accounting practice that ity to generate the data sets necessaryto support such neglectsnonmarket activity is also deficientfor the needs analyses.An expandedaccounting system that includes of developingnations. Althoughthis deficiencyhas not nonmarket,environmental activities can serve this tradi- receivedmuch attention in the literature, it should be tional role for those developingeconomies for whichthe clear that if nonmarketactivity is widespreadin an econ- nonmarketedeconomic activities are as important as the omy and if such activityis ignored in national data sys- marketedones. tems, then these systems will not be able to support accurateanalyses of economicbehavior. Implementation Problems Althoughcynics may feel that such analyticaldeficieri- cies affectthe communityof analystsfar more than the Severalproblems, unique in the developingnations, can communityof developingnations, the lackof a framework arise if the attempt is made to implementan expanded, for assemblingnonmarket data can havemore than mere nonmarketaccounting framework. Two of these are dis- academicconsequences. Development planners have be- cussedin this section. These problemsare not critical in comeincreasingly aware that 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 valuationdifficulties ties such as pollution, may produce a distorted viewof discussedbelow may not 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 nonmarketactivities can make to the analysisof the planning,particularly in its abilityto shed light on the opportunitycosts of actual and proposed development true opportunitycosts of alternativedevelopment strate- projects.Indeed, for estimatingtrue opportunitycosts as gies. well as benefits,it is the accountingframework, and noi: merelythe assemblyof nonmarketdata, that can make a Accounting for EnvironmentalAsset Depreciation significantanalytical contribution. This assertionderives from the fact that, in the absence The followingchapter emphasizesthe important dis- of perfectlycompetitive markets, observed monetary costs tinctionbetween physical deterioration and economicde- Environmentaland NonmarketAccounting in DevelopingCountries 61 preciation.Only the 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-wayto reflect this fact in a single set of ter, it is quite possible for a nonmarket (or a market) economic accounts. One year's income accounts could asset to remain physicallyintact but to depreciate eco- reflect the shrinking of the asset with a depreciation nomicallyin the sense that the present value of the ser- entry,and a singleset of wealthor asset accounts could vicesgenerated by the asset declinesover time. The op- displaythe remainingstock. Only by analyzingsuch ac- posite is also possible. An asset, such as the stock of counts overseveral years could inferencesbe drawncon- standingIndonesian hardwoods, can suffer sorne degree cerning when the stock willbe exhausted. Whether the of physicaldeterioration and still have its present value exhaustionof the stock willmean the demiseof economic increaseover time, which impliesnegative depreciation, activity cannot 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 which are tual collapseof the economybecause of the exhaustion amenableto technicalsolutions. Other issues are funda- of a natural resource. mentallymore serious, however,in that they address the To speak of eventualeconomic collapse is certainlya wholepurpose of the accountingexercise and 'the poten- dramatic characterizationof the sustainabilityproblem. tial conflictsbetween economic and conservationobjec- The dismalresult relies on one or more of the following tives.Thus, these latter issuesare addressedfirst. assumptions:that there is no technicalprogress, that the Environmentalistsand, increasingly,economic planners exhaustibleresource has no effectivesubstitutes, and that are concerned that developmentprograms may deplete there are, indeed, identifiableassets whose contribution certain vital natural resources. As a result, short-term to the economyis so crucialthat theirphysical exhaustion economicprogress could be followedby long-termeco- indeedwould mean economiccollapse. 5 Page apparently nomicdecline-that is, the growthmay not be sustaina- feels that it is fairlysimple to identifynatural resources ble. A related concern is that even if growthmay be able that meet these characteristics;he cites, for example,the to continue unabated,its compositionmay not, be suited establishmentof a strategicstockpile of critical materials to the tastes of future generations.Unless the full menu for national defense (Page 1977, p. 184). However,a of assets now availableis conserved,future generations strategicstockpile is intendedonly to fulfilldemands dur- will be deprivedof the options availableto the present ingfairly short-term events such as droughtor war.Decid- generation.Can and should the economicaccounts, ex- ing what assets are critical to the sustainabilityof eco- pandedto includethe servicesof the environment,reflect nomicgrowth certainly requires a longertime frame. these concerns? In the context of developing nations, one naturally The resources in question need not be confined to thinks of such resourcesas agriculturalland, forests,and nonmarket, environmentalassets. In fact, often the ex- watersupply as potential candidatesfor long-runconser- amplescited as such are marketed assets,such as miner- vation regardless of any calculation of present value. als and farmland.The argumentis that the privatemarket Those countrieshighly dependent on the export of min- mechanismis not sufficientto ensure that the stock of erals would certainlyadd such minerals to the list. Yet, these assets willbe adequatelypreserved for 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 economyacting optimally extent their calculatedpresent valuesdistort their true (to maximizethe present social value of 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 desalinizedsalt wateror imported Therefore,the value of vital assets as revealedby the fresh water are not practical alternatives).Therefore, it is market underestimatestheir true value to 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 value increasesat a greater rate, lead- the socialvalue of such assets should not be determined ing to an ever-increasingimputed or measuredvalue of by the present value of income generated in the future, fresh water wealth. Clearly,in this case, the apparent but rather by an appeal to a conservationethic, an ethic increase in the nation's water wealth would give a dis- that rejects economicvaluation as inadequateto reflect torted picture of social well-being.Can the same case be the needs of future generations. made for the criticalityof other, so-calledvital assets?To Before examiningthis argument, it should be noted answerthis question,it is useful to considerone poten- that if the depletionof someasset doeseventually lead to tiallycritical asset, agriculturalland. 62 Henry M. Peskin

Whetheragricultural land is as criticalas potablewater ValuationCriteria and 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, demandfor the individualparcels that 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 individuallynone could be considered however,even more seriousimpediments. These are more vital.Moreover, because the substitutabilityimplies high serious in the sense that they involveconceptual issues elasticitiesof demand, physicalreductions in individual that, unlike the paucityof data, are not easilycorrected parcelswill imply reductions in their values.That is, the even if a developingnation had more resourcesto work reductionsin quantitiesare less likelyto be offsetby high with. increasesin prices. Therefore,a present-valuewealth ac- One issue concerns the possibilityof determiningim- countingwould not falselyindicate an increasein land puted nonmarketvalues that are independentof a coun- wealth. try's economicand social structure. If, for example,the What if someof the parcelswere highly specialized and valuationprocedure relies on society'swillingness to pay the elasticityof demandwere highly inelastic for the prod- for the nonmarketedservices of a natural resource or ucts producedon these parcels?In this case, it is possible some other environmentalasset, then clearlyit wouldbe (but by no means assured) that a present-valuewealth impossibleto devisean economicvaluation without know- accountingcould indicate an increase in wealtheven as ing the society'spreferences. the physicalstock of such land declined.Although this If one acceptsthe principlethat a societyshould evalu- could possiblybe misleading,there would not be any ate its own assets,then the lack of a sociallyindependent serious social consequencesunless the products gener- valuationmay not provetoo troubling.It does create two ated by this land were so crucialthat the entire economy problems,however. First, it becomesdifficult to make any dependedon them. comparisonsof expanded national income and product Certainlyit wouldbe disastrousin a developingcountry among countriesif the countries have verydifferent eco- if the wealthaccounts indicated that the amount of land nomic and social structures. Second, tracking economic (in valueterms) devoted to, say,a crucialexport crop was performanceover time can also be difficultif there have increasingwhen, in fact, it was decreasing.However, the been substantialsocial and economicchanges. This sec- existenceof such a possibilitydoes not justifydeclaring ond problempresents a special conundrumif one of the all agriculturalland as crucialand, therefore,not subject purposes of economic accounting is to determine the to present-valuevaluation. Moreover, what may appear to extent of economicchanges. be crucial in the short run may be quite expandablein Thesepoints couldbe used to argue againstnonmarket the longrun. The stock of silk wormsis hardlycrucial to accountingin general. However,market prices also de- the present-day Japanese economy, but it may have pend on a country'seconomic and socialstructure. Thus, seemed so in the sixteenth century. Indeed, it could be as is well knownby nationalaccountants, comparisons of arguedthat, givenhuman ingenuity,virtually all assetsare nationalincome aggregates can also containlimitations if substitutablein the long run. If so, rather than searching the countriesbeing comparedare very different.Country for sustainablelevels of particularvital assets,the appro- A could have the higher GNP if its relative prices were priate conservationprinciple might be to maximizethe used for the comparison,while Country B could havethe levelof all assets in the aggregate.A natural measure of higherGNP if its relativeprices were used. Althoughthere this aggregate level 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 legacy for two-countrycomparisons if the different price relatives future generationsis a high levelof (properlymeasured) wouldmaterially affect the results. Alongthe same lines, incomeand capital formationin the present generation for makingcomparisons of nonmarketGNP betweencoun- (Baumol1969). tries, the prudent course of action would be to use valu- The accountingstructure put forth in the following ations that would reflect different economic and social chapterimplicitly adopts this viewwith two crucialprovi- structures. Of course, in viewof the difficultyof produc- sos (alsoendorsed by Baumol):that GNP (and the under- ing even one set of nonmarketvaluations, this procedure lying asset base) be defined to include nonmarket ser- is unlikelyto be followed. vices, particularlythe services of the environment,and Valuationmethods used to implementthe expanded that certain assets, such as air, potable water,plant and accountingstructure can be based on methodscommonly animalspecies, beautiful vistas, and the cultural heritage used for benefit-costanalyses. These methodsfrequently be recognizedas vital and irreplaceableand therefore use the conceptof willingnessto pay-the ideabeing that beyondeconomic evaluation and beyondthe scope of the the value of a nonmarketedgood or service should be expandedaccounts. measuredby what societywould be willingto pay for the Environmentaland NonmarketAccounting in DevelopingCountries 63 good or servicewere it marketed.In practice this usually lected,efforts should be made at monetaryvaluation. In meanswhat individualsin societywould be willingto pay. the U.S. contextbenefit-cost techniques were used. Thus, This focus on the individualis consistentwith the central for example,the valueto firmsof wastedisposal services propositionof capitalistic,free market economies:that providedby receivingwaters was 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 struztures differ is techniquesthat attempt to measuresocial willingnessto the problem of whetherthe willingness-to-payconcept is pay to avoid pollution (for example, the travel cost appropriatefor economicsystems that have ai more 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 valuationmethods are consistentwith thleseprinci- methodswill work in a developingcountry. Thus, a dy- ples? Answersto these questionsare important compo- 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 vast litera- countries. ture on benefit-costtechniques may provide a 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 principlesof the country'ssocial philosophy 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. importantsocial objectives-must be translatedinto con- Indeed, the U.S. experiencehas indicatedthat much of cepts that lend themselvesto measurementand valuation the preliminaryinformation, especially on the physicaluse if this objectiveis to be reflected in the expanded ac- of the environmentfor wastedisposal, is of great use to counting system.Indeed, it may not be possibleto de- policymakers.Nevertheless, because so much of the infor- velopvaluation schemes that fullymeasure thie degree of mation necessarilyhas to rely on estimationrather than sustainability.Yet, it is important to poinitout that the on direct observation,the pilot project is probablybest accountingframework, even withoutcomplete or perfect done by a nongovernmentalagency, such as a university, monetaryvaluations, can providea data systemthat can in cooperationwith variousministries that could provide be of tremendoususe to those responsiblefor making some of the supportingdata. sustainabledevelopment policy. It is difficultat this time to be too precise about the appropriatestaffing of such a pilot effort in a developing Suggested Course of Action country.Regardless of the level of effort, however,it is important,for two reasons, that the bulk of the work be Althoughthere is some experiencein implementingthe done by nationals and not by foreign consultants.First, expandednational accountingstructure describedin the because a long-term,multiyear effort is necessary,heavy followingchapter, the effort to develop this framework staffingby consultantsis likelyto make the costs prohib- reliedtotally on data from,and condition;in, the United itivelyhigh. Second, unless the bulk of the work is done States (Peskin1987). No case is knownwhere this system by nationals,there is a good chance that the accounting or some other nonmarketaccounting has been fullyim- effort will die when the consultants depart. Thus, an plementedin a developingcountry, although there have important goal is not simplyto constructa resource ac- been some partial efforts (Repetto and others 1987). counting system, but also-and perhaps more impor- Thus, implementationor, more precisely,initial steps at tant-to developresource accountingskills in the coun- implementationshould be viewedas a pilot project. try. At a minimum,a viableprogram, which would achieve Basedon the experiencein the UnitedStates, the start- these goals, would require two full- time nationals and ing point is to assemblea completebody of physicaldata about three to six staff-monthsof outside consultantsa coveringthe stock of environmentalassels, 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. recreation servicesby householdsand tourists, and the Should the expanded accounts be confined to environ- demandfor potablewater), and the negativephysical con- mental assets or shouldthe effort attempt to cover a full sequenceson final and intermediatedernand from con- spectrum of nonmarket assets? In principle, the latter sumption of these services (for example,adverse health approachis preferable,basically because a fullyexpanded effectsfrom water pollution,damage to crop production accountingsystem will be able to show important rela- from soil loss, and damageto electricityproduction from tions betweenenvironmental asset use and other nonmar- sedimentation). ket activity.For example,the amount of labor devotedto After or, better yet, while the physical data are col- householdfuelwood production, a significantnonmarket 64 HenryM. Peskin

activity in many rural societies, crucially depends on the have the desired characteristics,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. Followingthe analysisof Marglin(1984), if an economic Analysisof such projects as the development of plantation systemwere based on neo-Marxistprinciples, consumer sover- forests would be greaty facilitated if the accounting sys- eigntywould be limited,in theory,to the short-rundetermina- tion of output mix. In contrast,if an economywere structured tern reflected these interdependencies. accordingto neoclassicalprinciples, consumer sovereignty would Realistically, limitations of available staff and money have a much larger role to play. Of particularimportance for 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 determiningrelative prices. 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,William J. 1969. "On the DiscountRate for Public Projects."In U.S. Congress,The Analysis and Evaluationof PublicExpenditures. The PPB System. Papers submittedto Notes the Subcommitteeon Economyin Governmentof Joint Eco- nomicCommittee, vol. 1. 91st Congress,1st session. 1. In the accountingscheme outlined in the followingchap- Blades,Derek W. 1975. "SubsistenceActivities in the National ter, depreciationof natural resourceswill not affect the gross Accountsof DevelopingCountries with SpecialReference to productaggregates, such as GNP. LatinAmerica." Review of Incomeand Wealth21(4, Decem- 2. Of course, such a viewneglects the importantdistinction ber):391-410. made in the followingchapter between changes in physical Landefeld,J. S., and J. M. Hines. 1982. "ValuingNonrenewable stocks and changes in the value of those stocks. A country Natural Resources:The MiningIndustries," In U.S. Depart- could be sufferinga real loss in wealtheven if physicalstocks ment of Commerce,Measuring Nonmarket Economic Activ- of certainnatural resourcesincreased, if the resources:n ques- ity. Bureau of EconomicAnalysis Working Paper. Washing- tion proved to have decliningvalue. The shift from tropical ton, D.C. hardwood forests to softwood plantations in Indonesia may Lind, Robert C., KennethJ. Arrow,Gordon R. Corey,Partha providean example. Dasgupta,Amartya K. Sen, ThomasStauffer, Joseph E. Stig- 3. Althoughthe terms "shadowcost" and "shadowprice" are litz, 3. A. Stockfish,and Robert Wilson. 1982. Discounting widelyused, they are often defined differentlyby differentau- for Time and Risk in EnergyPolicy. Washington,D.C.: Re- thors. Here the terms are used rather loosely to refer to the sourcesfor the Future. unit values, necessarilyimputed, of nonmarketedgoods and Little,1. M. D., and James A. Mirrlees.1969. Manual of Indus- services.Depending on the imputationprocedures, the term trialProject Analysis in DevelopingCountries. Vol. 11, Social could be equivalentto severalshadow concepts. Examples are Cost-BenefitAnalysis. Paris: OECDDevelopment Centre. the shadowprices generatedby a linear programmingproblem Marglin,Stephen A. 1984. Growth,Distribution, and Prices. or the shadowwages, as defined by Little and Mirrlees(1969), Cambridge,Mass.: Harvard University Press. used to measurenet consumptionchanges associated with the movementof labor from agricultureto industryas a result of Page, Talbot. 1977. Conservationand Economic Efficiency. developmentprojects. Baltimore, Md.: Johns Hopkins UniversityPress for Re- 4. The followingchapter shows,however, that the two con- sourcesfor the Future. cepts can be related. Valuedepreciation can be definedto equal Peskin,Henry M. 1987. "NationalAccounting and the Environ- physicaldeterioration minus capital gain or plus capital loss. ment." Resources for the Future, Washington,D.C. Proc- Nevertheless,the two conceptsare quite distinct. essed. 5. In effect,the resultpostulates a verysimple econornywide Repetto, Robert, MichaelWells, Christine Beer, and Fabrizio productionfunction, which is not separablewith respectto any Rossini.1987. "NaturalResource Accounting for Indonesia." of its inputs.A simpleCobb-Douglas production function would WorldResources Institute, Washington, D.C. Processed. 10

A ProposedEntronmental Accounts Framework

Henry M. Peskin

The objectiveof expandingthe nationalincome and prod- the economy,whether or not these materialsare valued uct accountsto encompassthe environmentrequires the with a positivemarket price. Usingtechniques of interin- developmentof a theory linkingenvironmental data with dustry or input-outputanalysis, these material balance the economic information already covered by conven- approachesare easilylinked to the economicdata drawn tional national accounts. Such a theory is presented in fromnational accounting systems. this chapter. Both an advantageand disadvantageof this approach The cost of the proposed expansionis minimizedby is its apparent neutrality: only materials are being ac- adheringas much as possibleto the accountingstructure counted for; there is no indicationwhether these materi- of existingnational income and product accounts,such als are good or bad. This is in contrast to other environ- as the U.N. Systemof National Accounts(SNA). Indeed, mental accountingschemes that attempt to measure or the suggestedchanges are introducedas separableaddi- otherwiseaccount for the negativeeffect of pollutionand tions to the existingaccounts. In this way,the modified human activitieson the environment.These approaches accountspreserve all existing information,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 additional environmental degradation. Implementinga scheme based ronmentalinformation. Because of the close linkage to only on the measurementof physicalflows is far easier. conventionalaccounting structure, this discussion pro- However,even though a material balance accounting videsan overviewof the conventionalincome and product scheme may be useful to organize and display certain accounts,presents a modifiedaccounting structure, and environmentalinformation, by itself it is not sufficientto emphasizeshow closely the proposedmodiFications fit the augmentthe coverageof the accounts. existingnational accounting concepts. The problem is that the elementsincluded in the accounting scheme should 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 first issuethat ariseswhen one sets out to account elementsbeing measured,then such a scheme by defini- for the environmentis to decidewhat aspect of the envi- tion says nothing about economicwelfare. Materials ac- ronmentwill be 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 generationamd disposition can be drawn about economicwelfare from material ac- of pollutingmaterials. Thus, followingthe lead of Ayres counts just 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 physicalflows of materialsthroughout in differentunits (for example,tons of cement, barrels of oil, and gallonsof water).The material accounts,themselves, offer no guidance on how to do this aggregation. Note: Someof the materialin thischapter, including a graph- For its full implementation,the accountingscheme out- 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 environmentalwith nonenvironmentalentries. made wisely.More specifically,the chosen amount of pol- Oftenit is necessaryto measuresuch physicalinformation lution generated is assumedto be that which maximizes as the quantity of air and water pollutants emitted by profits for pollutingproducers or which maximizesutility industrialcategory. Efforts to build materialbalance ac- for pollutingconsumers. countsand effortsto build the expandedaccounts can be Generally,the less pollution is generated or (what very complementaryactivities. The objectivesof the two amounts to the same thing in this simpleexample) the exercisesare, in principle,however, very different. less use is made of the disposalservices of the environ- Rather than materialflows, this expandedscheme at- ment, the more costlyit is for the producer.Therefore, it tempts to cover flows of servicesgenerated by environ- is assumedthat there are positivebenefits to the polluter mental capital.It is based on two concepts:all income associatedwith higher pollution levels, which, however, at originatesfrom capital,and the physicalenvironment is a somepoint begin to becomeless positive.Indeed, if these form of capital fundamentallysimilar to the other forms levelsget too high, the pollutionmay beginto impedethe of tangibleand human capitalthat generate the income productionprocess (say, by affectingthe workers'health), flowsalready accounted for in the conventionalaccounts. and thus the benefitsof pollutingmay even decline.(Since The first concept, whichexpresses the fundamentalrela- the producer is assumed to be rational, however,such a tion betweenincome and capital,has been wellaccepted situationwould not exist for very long.) in modem economicthought ever since it was originally Up to now,the focus has been on the benefitsof using stated (Fisher1906). The secondconcept, while hardly in environmentalassets and on the associatedpollution by the same central positionin economicthought, would not the polluter.The other side of the coin is now considered, be found to be objectionableby most economists.The namely,the "disbenefits"or damagesthat may be associ- environment"is a form of social capital which society ated with the use of environmentalassets. There are two must somehowmanage if it is to maximizeits welfare" sorts of disbenefits.One is the familiardirect damage that (Johnson 1975, p. 321). Why this type of capitalneeds pollutionby one party can inflict on another. Air pollu- social managementwhile other 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 environmentalmanagement. benefitsas negativebenefits, one can imaginea relation This theoryunderlies both the proposedaccounts frame- betweenpollution and disbenefitsthat, in general, indi- workand the proposedmethods of valuation.' cates virtuallyno disbenefitat verylow levelsof pollution, Although,as argued above,material flow accounting by a rapid increasein disbenefitat moderatelevels of pollu- itselfdoes not providesufficient information to add to the tion, and a satiation of disbenefitat very high levels of accountingof the elementscomprising economic welfare, pollution.Although this pattern is realisticfor many pol- the material flow and the proposed asset service flow lutantsthat cause adversedirect health effects,other pat- approachare highlycomplementary. This is becausethe terns are possible.This pattern, however,along with the productionof any material,whether it is a product to be assumedform of the relation betweenpollution and ben- sold or a wastematerial to be disposedof, can be linked efits, illustratesthe frequentsituation where the net social to the servicesprovided by some specificasset. Just as benefitsof pollution(the sum of the benefitsand disbene- the productionof goods sold in the marketplacereflects fits) reaches a maximumat some positivepollution level, the capitalservices of the plant and machinesusecd in the (wherethe marginalbenefits and disbenefitsof pollution manufactureof the goods,likewise the productionof waste are equal)but where pollutionis at a lowerlevel than the products,such as smoke and spent process and cooling polluter finds optimal. Assuminga known relation be- water,reflects a demandfor the capitalservices provided tweenenvironmental asset use and pollution,optimal units by the environment-servicesof waste disposal,cooling, of environmentalservice rather than pollutioncould also and the provisionof importantinputs, such as oxygenfor be determined. burningor nutrientsfor crops. The secondtype of disbenefitoccurs whenthe pollution To understandthe relationbetween the demandfor the or environmentalasset use denies someone else use of servicesof environmentalassets and the generation of the environmentalasset. For example,using a lake for pollutants,however, an important principlemust be es- waste disposalmay deny the use of the lake to someone tablished:the polluteralways has some choice about how elsefor gettingpotable water or fishing.This second type much pollutantwill be generated.Thus, whilesome pol- of disbenefitis referred to as an indirect disbenefitto lution maybe an inevitableconsequence of mostproduc- distinguishit fromthe direct disbenefitsdiscussed above. 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,depending on a multitude exist only if there is a finite amount of availableenviron- of decisionsaffecting production levels, production tech- mental asset service. nique, and product mix.2 The model underlyingthis ac- For the proposed accountingframework, three key el- A Proposed Environmental Accounts Framework 67 ementsare relevant.First, and most important,both pos- marginalunit sold.All other so-calledinfra-marginal units itiveand negativebenefits are associatedwith any amount are valued at this same price (assumingthat the seller of pollutingactivity. Thus a singleaccounting entry will, cannot practice price discrimination).To measure the in general, not be adequate to capture the effects of disbenefitsassociated with the use of environmentalas- environmentalasset use. Second,with a finiteavailability sets, marginal valuations should be used.4 One important of environmentalasset services,the identificationof one advantageof marginalvaluations (besides consistency) 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 environmentalasset use is greater or less than the optimal not alwaysappropriate. The accounting system should use, which maximizesnet benefits.At the optimal level, recognizethat any actor in the economymay be using the marginalbenefit and disbenefitvaluations are exactly environmentalasset servicesto the detrimentof another equal; at levelsgreater than that, the marginalvaluation actor. A third element concerns the effect of the total of disbenefitexceeds the marginalvaluation of benefit; availabilityof environmentalasset services.If the availa- and, at levelsless than that, the marginalvaluation of bility of such services is very great in relation to the benefitexceeds the marginalvaluation of disbenefit.These demandsplaced on the environment,and dLependingon latter situationscan be interpreted as conditionsfor too the methodchosen to placevalues on these demands(see much and too little pollution,respectively. Although mar- below),it may be appropriateto ignore certain environ- ginal valuationsallow for this interpretation,total valua- mental asset uses in the accountingsystern. Of course tions are usuallyeasier to estimate. treatingall environmentalservices as free goods and not Up to now, cost and valuation principles have been assigningany value to them has in part contributedto used for the situation where a polluter creates a direct the current environmentalproblems. The point being disbenefit.For indirectdisbenefits, in additionto the total made here, however,is that a judgmentmust be made on benefit to party 1 (formerlythe polluter),the fact that a case-by-casebasis on whetherassigning a zero valuefor party 2 (formerlythe party sufferingdirect pollution dam- accountingpurposes is justified. age) enjoysa benefitfrom the remainingunits of environmental assets 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 valuation methods,a distinctionshould be made damageparty 2 causesparty 1 by denyingparty 1 various betweenthe cost of pollutioncontrol already incurred by unitsof asset service.Again at the optimallevel, marginal pollutersand the potential cost to pollutersequal to the valuationsof benefits and disbenefitsare equal. As op- forgonebenefit if they weredenied accesstci the environ- posedto the analysisof directpollution damage, however, ment (whichequals the value to the polluitersof 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 conventionaleconomic ac- little pollutionor asset use. It can be said only that one counts (althoughit may not be clearly identifiedas a party's use at the expense of the other party's use is too pollution control cost). The latter cost is not currently excessiveto be sociallyoptimal. accounted for. Yet its estimation is important for the expanded accountingsystem, since it provides an esti- Investment and Depreciation mate of the value to polluters of disposalservices providedby the environment.This cost, that is, the prospec- Conventionaleconomic accounting 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 environmentalasset service)just and net investment,the latter being equal to gross invest- as, say, the wage bill measures the value of a marketed ment less capitaldepreciation. In expandingthe conven- factor input (labor). tional accounts to include environmentalasset services, As environmentalassets are used and pollution pro- these distinctionsshould be preserved. In particular, induced, disbenefits are also produced; this is also ne- vestments that increase the environmentalasset stock glected in conventionalaccounting systems. Most availa- should be accountedfor if this is not alreadydone in the ble measuresof these disbenefitsrely on total valuations: conventionalaccounts. Similarly,there will be an entry the total value societywould be willingto pay to avoid measuringany depreciationin environmentalassets. 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 conventionalaccount- goods in the conventionalnational accounis. The usual ing, however,although the definitionsused are consistent valuation for marketed goods is a price-times-quantity with economictheory. valuation,the price in questionbeing that for the last or Specifically,following Alfred Marshall(1920), income 68 HenryM. Peskin

(regardlessof whether it originates from marketed or equals consumptionplus net investmentand net invest- nonmarketedcapital) is definedas the sumof currentand ment equalsgross investmentless depreciation,however, potentialfuture additionsto well-being.The formationof net incomethus equalsgross incomeless depreciation.It capitalthat allowsfor both additionsto future income followsfrom equation3 that net incomeequals iVo. Thus and the maintenanceof current income is gross invest- equation3 can be rewrittenas: ment. If current additionsto well-beingare identifiedas consumption,gross incomecan be defined as consump- (4) = Cl + I1 + D, tion plus gross investment.Net income is simply con- where C and II are consumptionand net investmentin sumption plus net investment,where net investmentis year 1. In other words, gross investmentless that portion of capital investment just necessaryto maintaincurrent levelsof consumption. Grossincome = net income + (value)depreciation Althoughdepreciation is defined conventionallyas the = consumption+ net investment differencebetween gross and net investment,one should + (value)depreciation also distinguishbetween value depreciationand physical = consumption+ gross investment. depreciation. This relation between income and depreciation was One reason that depreciation exists is that the physical dvlpdwtotayrfrnet h hscldsrc abiitt geerteofcaita onumaleserics dclne developedwithout any referenceto the physicaldestruc- ability*ofcaptal to generate consumae s aepsdecli 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 value of the capital exceed V'. However,future Q's may fallfor other reasons, stock-value depreciation;that is, value depreciationmay such as a fallin the demand for the capital'sservices. The reflectphysical depreciation. However, value depreciation Q's may also decline because of an inabilityto employ can also arise for other reasons.The valueof capitalcan fall because of a changein tastes for consumptionItems thcailfuy.Ttisifapalomeensabra declinein labor serviceswould also bring about a decline producedby the capitalor simplybecause of 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 presumablybecause it generates a stream of . ouv in prince ecedion. Conven al goods and services,that is, income.Let V0represent this tive and to refer to the case where V, exceeds Vnas a value at 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. Also Q, is definedas grossincome can onlymean physicaldepreciation. Rather, value depre- in year 1. ciation is decomposedinto two components:the portion Vocan be related to the Q's as follows: of the differencebetween V0 and V, that is due to actual

Q __Q_ Q physicaldepreciation and the portion that is due to other (1) VO= (1 + *--+ (1+ +y causes.The latter,if positive,will be termed "capitalgain" and, if negative,will be termed "capital loss." Thus by where i is the rate of interest.Since V, the valueof Voat definition: the end of year 1, is simply (5) Valuedepreciation = physicaldepreciation minus Q2(+ + + Qn+'Il capitalgain or plus capitalloss. 5 (1+t) (1+02 (1+1')+* Of course, the physicaldepreciation must be valuedto equation 1 can also be written: makethis computationpossible. How the unitsof physical Q, V Q, + V loss should be valued-using the original price of the (2) VO (1+0 + T11 (1+i 1 capital,its currentprice, or some other price-is a matter of somecontroversy. Since the choice affectsthe measure fromwhich it followsthat of physicaldepreciation, it has importantimplications for (3) Qi = ivo + (VO VI). both corporateaccounting (which is not of concern here) and for national accounting(which is of concern).If the The term (Vo- V,), representingthe loss in value of focus is on value depreciation,however, the implications the initial capitalstock, can be identifiedas valuedepre- of choosing among alternative capital prices can be ciation occurringin 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 applicationof equation 5. A ProposedEnvironmental Accounts Framework 69

Sources of Environmental Asset Depreciation the number of individualsis n, each of the identicalindi- vidualsis allottedzin of seashore. Like any other capital asset, the depreciationof the The implicationsfor the asset's value depreciationde- value of an environmentalasset is due both to physical scribedin the secondexample are more complicatedthan depreciationand capitalloss (or gain).To illustratethese those illustrated in the first example.Even though the two sourcesof value depreciation,two assets are consid- amountof externaldamage each user inflictson the other ered: one experiencesonly physicalreduction while the increasesas the numberof individualsincreases, the total value of the other depreciatessolely because each user utilityfor all individualsas a group increases.Algebrai- perceivesa reductionin the qualityof servicesprovided. cally,at the time the numberof individualsn is moderate, The former asset mightbe a lake whoseonly service is to the assumedutility of each individual(for a Pareto opti- provide drinking water. It is assumed that as drinking mal distribution)is u = u(zln).This utilitydecreases as n wateris withdrawn,neither manmade nor natural replen- increases.However, the total utilityfor all individualsis ishment takes place, so that the availabilityof drinking nu(z/n);this utilityincreases with increasesin n, although water is steadilyreduced. 6 The second examplemight be at a decreasingrate. In effect,previous seashore users are a stretch of seashoreof a givenlength. It is assumedthat worse off as n increases, but, because there are new the only serviceprovided by this asset is recreationand, users, total utilitymay increaseeven though averageutil- further,that as the demandfor this serviceincreases, the ity falls.Total utilitymay also decrease,however, depend- qualityof serviceperceived by eachdemander diminishes. ing on the relativesize of an individual'stotal and mar- In the first example-the demand for the services of ginal utilitywith respect to n. The theoreticalchange in the first asset, drinkingwater, over time by two users-in total utilityas n increasesis u(zln) - u'(zln)Jn,and this order to clearlydistinguish the two sources of value de- can be either positiveor negative. preciation,each user's demand is assumedto be constant In sum, it is not self-evidentthat the value of an asset overtime. Also,to keep matters verysimple, the demands that does not deterioratephysically declines as it becomes are assumedto be identical,and the capitalgain compo- more heavilyused. A recreationalasset may experiencea 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 reduced below2X, the remainingasset is as- the servicesprovided. Whether the value depreciationof sumed to be equallyshared. Under the assumptionthat such an asset is positiveor negativedepends on a com- the demand functionsare identical,such ameven alloca- parisonbetween the decliningutility of each user and the tion is Pareto optimal:no other allocationcan make one increasingnumber of users. One important but perhaps user better off withoutmaking the other worseoff. disquietingimplication is that if marginalvaluations are The implicationfor the lake's value over time is quite used, a pristine lake has no valueuntil a point of conges- simple. Since the availabilityof drinking water is more tion is reached, that is, the point where demand curves than adequatefor both users, for a time there is no value start crossing.Actual physical congestion is not required; reductionand hence no value depreciation,even though a demandcan exist withoutactual use if the demand is 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 may suffice to give value to the soon as the lake's capacity is reduced t:) 2X drinking pristine lake. water units, the value of the lake begins to decline,and Nevertheless,many would feel that the pristine lake has value depreciationincreases. That is, the value of the valueeven in the absenceof optiondemand or any other physicaldepreciation becomes positive. source of demand.Even if everyoneaccepted this view,it The second polar exampleis represented by the sea- wouldnot vitiatethe theoreticalstructure just presented. shore. It is assumedthat there is an increasingnumber of The key point is that the accountingsystem discussed in identical individuals,each demanding the same fixed this chapteris intended to coveronly elements that affect length of seashore.To showthe effectof this increasing economicwelfare. Consistentwith this objective,valua- demandin a two-dimensionaldiagram, the individualsare tions are confinedonly to economicvaluations-not to dividedinto two groups of equal size. Three basic situa- valuationsthat may havereligious, ethical, or philosophi- tions arise: (1) when the number of individualsis small cal foundations.Unlike other sources of value,the basis enough that their maximumdemand is less than the for economicvaluation is the interactionof demand and seashore capacity,(2) when the number ef individualsis supply. moderate so that their maximumdemands just exceed seashorecapacity, and (3)when the numberof individuals Overviewof the National Accounting Structure is so large that their summedmaximum demands greatly exceedseashore capacity.For the latter two casesa Par- To analyzethe implicationsof this theory of environ- eto optimal distributionis assumed:if capacityis z and mental assets for the proposed modificationto the con- 70 HenryM. Peskin ventionalnational economic accounts, it is useful to dis- Table 10-1. Input and Output Accounts cuss briefly national accounting concepts.7 For for a HypotheticalEconomy illustration,this discussionfocuses on the U.S. national IndustryB accounts and concentratesprimarily on the irrethod of IndustryA (Pollutioncontrol industry) Government accountingfor the inputs and outputs of marketed enti- Input Output Input Output Input Output ties in production processes. The expanded accounting XBA XAB XAB XBA LC X frameworkplans to treat the inputs and outputs of envi- LA XAG LB XBG XAC ronmentaland other nonmarketentities in an analogous DA X, D, X. XBG manner. TA XAG TB XBG Since 1958 the U.S. national accounts have consisted -SA -SB of fivesub accounts:national incomeand product, per- PA PB sonal incomeand outlay,government receipts and expen- Note:X is the outputof goods and services,L is labor,D is deprecia- ditures,foreign transactions, and gross savingand invest- tion, T is taxes,S is subsidies,and P is profit or loss.The firstsubscript refers to the generatingindustrial sector (or government)and the sec- ment. The nationalincome and productaccount includes ond, if any,refers to the receivingindustrial sector. gross nationalproduct (GNP),net nationalproduct (NNP), and national income (NI)-the indexes that receive the 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 fromproposed changes in the treatmentof environmental period. The proceedsfrom these sales are dividedamong asset services,any effectson these accounts willbe re- severalinputs shown on 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 focusing on just one chased for use in the accountingperiod; LA, the amount account,and the discussionis greatlysimplified. spent on labor; TA, the amount spent for indirect taxes The incomeand product account is a consolidationof (that is, all taxes except taxes on income);SA, any subsi- many individualaccountings of productiveactivities, the dies receivedby firm A (which,as shown,are valuedas bulk of which are those of businessenterprises and fed- negativeinputs); and P4, profit or loss. SincePA is deter- eral, state, and local governments. The consolidation mined as a residual,the left-handand right-handsides of 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 economydoes not engagein foreigntrade nor whereas capital goods by definition are used up over are there any interest chargesfor borrowingmoney. Also, severalaccounting periods. The portion of capitalthat is it willbe useful for later discussionif firmnB is assumed used up in the accountingperiod or depreciation(includ- to be a producerof pollutioncontrol equipment. ing other capital consumptionallowances such as acci- The dollarvalue of the outputof eachfirm in the period dental damageto capital)is designatedas DA.Again the coveredby the account (usuallyone year) willbe repre- items that make up firmnB's input, shownon the left-hand sented by X, with subscripts indicating the 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 governmentproduction of goods and services in be used up or consumedwithin the current accounting the accountingperiod is XGG.The notationindicates that periodand goodsthat are used up overmany accounting the governmentis viewedas producinggoods and serv- periods. The former are termed current goods, and the ices for its own use and not for other sectors. In conven- latter are termed capitalor investmentgoods. tional national accounting,because of the difficultyof Firm A's output of current goods is designatedby XAB, valuinggovernment output, XGGis set equal to the wages XAC,and XAG,representing goods that willbe used up in and salaries paid to governmentemployees, 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 mental production account is thus verysimple. Govern- are called current account outlays. Firm A's oultputof ment transferpayments are not shown,since such trans- investmentgoods is designatedby XA. Expendituresfor fers do not reflect any new production in the economy. these goodsare calledcapital account outlays. Since these Similarly,taxes are not shown,since these are not consid- goods are not used up in the accountingperiod, the ered as inputs to governmentproduction. Such financial inputs of such goods to sectors A and B are not shown. items as taxes and transfers showup 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

Table 10-2. ConsolidatedProduction Account no capitalconsumption accounting is also a theme of this for a HypotheticalEconomy chapter. Input Output Unfortunately,this simplifiedexposition fails to address LA + LB + LG XAC+ XBC(consumption) severalcontroversial issues concerningthe ability of the PA + PI accountsto measurewell-being. For example,the classi- Nationalincome XAI+ XBI(investmrrent') fication of many items as investment,consumption, or TA+ TB intermediategoods is not alwaysself-evident. Many items -(SA + SBl) such as consumerdurables are classifiedas consumption Net nationalproduct XGG(government) items when they could just as easily be classifiedas in- DA + Di vestment items. Another issue concerns the failure to ChArgesagainst gross Grossnational product considerany portion ofgovernmental production as inter- nationalproduct mediate,even though such governmentservices as polic- Note:See the note to Table 10-1 for definitionsof the notation. ing and inspectionare often essential inputs to business Entriesin boldrefer to the sumof all entries abovethem. operations.A third issue concerns the fact that the accountingstructure and its aggregatesdo not reveal how any of the componentsare distributedamong members assumption, all conventional(thatis, marketed) produc- of the population.A societyin which 10 percent of the tion takes place yieldsthe nationalincome and product populationenjoys 90 percent of the consumptiongoods accountfor this simpleeconomy. This account, in effect, producedcould have the same total GNPas another soci- pictures all the economy'sproduction as taking place in ety where consumptiongoods are much more evenlydis- one huge sector.The consolidationis performed by add- tributed. Fewwould believe that both societiesshared the ing A'sinputs to B's and the government'sinputs, 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 eliminatingitems that appear in both the input and out- in the above simplified exposition is the limited role put totals. In this simpleeconomy, the itemsso eliminated householdsplay as 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 activities that take place in well-definedmarkets and accountingperiod are termed intermediategoods. In the where productionis alwaysreflected in monetarytrans- United States and in the accountingsystems of most actions. This preoccupationneglects, for example, the westernnations, such intermediategoods are not shown high portion of productiveactivity that occurs withinthe in the consolidatedincome and product account, since household.9 The fact that GNPfalls when "a man marries their value is already reflected in the value of the con- his housekeeper"is a curiositythat is highlyrelevant to sumption,investment, and the governmentalproduction the treatmentof all nonmarketproduction, including, as items included. shall be shown,the prospectivetreatment of the services Table 10-2shows the results of the consolidation.The of the environment. principal national income and product aggregatesare defined by the groupingsindicated by 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 defined as total productionof goods and servicesfor consumption,investment, and the In recent yearsthe abilityof conventionalaccounts to government.8 Since the consolidatedaccount must bal- reflect social well-beinghas been scrutinizedmore and ance, GNP may also be defined as the sum of lalborpay- more. One can identifymuch of the problem as a failure ments, profits, indirecttaxes less subsidies,and depreci- of the accountsto reflect adequatelyeconomic yet non- ation. The sum of labor paymentsand profits alone is marketedentities. callednational income (Nl). It represents the sum of pay- Usingthe simpleaccounting framework just presented, mentsto factors of 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-forwhich payments are not made is, 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 inadequaciesignores such failures as the con- less depreciation.It thus provides a measure of output ventionalaccount's inabilities to measure fullythe effect that accountsfor the fact that a certain portion of gross of changes in householdproductive activity or in the output must be set aside to replace deteriorationof the services of government capital. However,the analysis nation's stock of capital.The fact that there may also be could easily be modifiedto cover these other nonmar- deteriorationin environmentalcapital for whichthere is keted entities. 72 HenryM. Peskin

As manyhave noted, a decline in environmentalquality willbe necessaryto distinguishthe effecton the accounts maybe accompaniedby an increasein GNP. In this simple in the year the investmentis made from the cumulative economy,increases in, 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 consolidatedaccount. (They of certain services,such as medicalservices, which also are canceled out, since they are on both sides of the lead to a further increase in conventionallymeasured consolidatedledger.) However, the fact that such transac- GNP. Of course, if the pollutionwere bad enough,work tions betweenbusinesses are not shown does not mean abilitymight decline,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 firm B devotesto producepollution dire circumstancesGNP will movein the "right" direction controlequipment to 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 Althoughdeclines in environmentalquality are often XB4and XBG.Therefore, barring a sudden changein tech- accompaniedby increasesin GNP, it does not necessarily nology,the increasein XA must be at the expenseof one followthat improvementsin environmentalquality must or more of the elementsof GNP. be accompaniedby reductions in GNP. The directionof The same result must occur if firm A uses its own labor the movementof GNP or other account aggregates de- for pollutioncleanup. If A attemptedto maintainits pro- pends on how the environmentalimprovement 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 intermediate goods, firm B, which was assumed to be in the business of XAB, firm B wouldhave to reduce its output, since XABis manufacturingpollution control equipment,provides XBA B's raw material.The pollution controlfirm B might try units of antipollutionequipment to firm A, XBGunits of to maintainits productionof goodscounted in GNP (XBC, equipmentto government,and XBCunits to consumers. X,,, and XBG)by reducing its intermediate production, Suppose,in responseto further environmentaldegra- XBA.This possibilitycan be ruled out, since such a re- dation, consumersor the governmentdecide to increase sponse wouldmean an increasein pollutionby A rather purchasesof antipollutionequipment. In a fullyemployed than the postulateddecrease. Thus, divertinglabor either economythe postulated increase in XBCby consumers for the productionof current account, intermediatepol- must come at the expenseof a reductionin XAC(thai: is, lution control equipment or for in-house cleanup must a fall in consumptionof goods other than for pollution reduce the GNP."1 If, as is usuallythe case, however,most abatement),a reductionin XA,or X,, (that is, a reduction of the pollution control depends on the purchases of in investment,which is 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 postulatedincrease in XBGby pollution control outlays of consumerswere analyzed. governmentmust, in a fullyemployed economy, be either The only short-termeffect will be on the compositionof at the expenseof XAC,XBC', XAI XBI, or at the expenseof GNP, not on its level. other componentsof XGG, such as XAGor LG. Yet,over the longterm the situationmight be different, Althoughsuch reductionsmay changethe composition since changesin investmentare likelyto cause changesin of GNP and NI, it willnot changethe levelof GNP or Nl.10 other typesof output. Thus, investmentthat is divertedfor To the extent that investmentis reduced, NNP may rise environmentalpurposes will result in fewermachines and slightly,since depreciationmay fall.(The remainingcapi- less equipment to support ordinary production. Some tal maybe usedmore intensively,however, causing capital economistshave estimatedthat for each 1 percent of in- consumptionallowances to rise.) Of course, if there were vestmentso diverted,output, as measuredby NI, falls by unemployedlabor and capital resources,the increasein approximately0.3 percent (Denison1979a, 1979b). Al- XBCneed not engender any reduction in other outputs, thoughinvestigators have disagreed about the exactamount thus allowingall the accounting aggregatesto rise. In- of the declinecaused by divertedinvestment, there is gen- deed, an expansionin employmentand output has been eral agreementthat increasesin pollutioncontrol invest- associated with pollution control expenditures in the ment will have some dampeningeffect on the account UnitedStates (DataResources 1979). aggregates,again makingthese aggregatespoor indicators The situation is much more complicatedwhen, as is of environmentalimprovement and overallwell-being. 12 often the case, businesses,rather than consumers,purchase antipollutionequipment (Denison 1979b). The ef- A Modified Accounting Structure fect on the accounts depends on whetherthe pollution abatementexpenditures are current or capital account The abovetheoretical structure suggestsboth a frame- outlays.Also, if the outlaysare for investmentgoods, it workfor introducingthe servicesof environmentalassets A ProposedEnvironmental Accounts Framework 73 into the conventionalaccounts and the principle;for eval- uct account is rather simple.Likewise, the modifiedac- uating these services.Basically, the frameworkassumes count shown in Table 104 is very simple. It contains that these servicescan be treated as unpaid facl:orinputs those additionalentries that accountfor the government's to either production or consumptionactivities. The ad- use of the environment,the resulting damage, and the verseeffects of pollutionor of the denial of environrnental necessarybalancing entry. However,it also differsfrom servicesto others caused by the use of the servicesas the industrialaccount in that it displaysan entry account- inputs can be treated as negativeoutput or damages.13 A ing for environmentaldepreciation. The implicitassump- balancingterm is requiredto assure that the converntional tion is that all environmentalassets are "owned"by the equalitybetween total inputs and outputs is maintained. government. The followingset of accounts,modified to reflect these ideas, is rather similar to the conventionalaccounting structure outlinedin Tables 10-1 and 10-2.14Although Households Table 10-2 showsthe consolidatedaccount as a combination of industrial and governmentalproduction ac- The conventionalnational accounts assume that very counts, here the consolidatedaccount is a coimbination little productiontakes place in households(primarily ac- of productionaccounts in four sectors: industry,govern- counted for by nonprofitinstitutions and the servicesof ment, household,and the environment(nature). To make domestics)(Table 10-5). The focus of the conventional them more understandableto those familiarwith the con- accounts on activitiesthat reflect market transactions ventionalaccounts, additional entries are shown,which, precludesconsideration of the outputs related to keeping to simplifythe exposition,were neglectedin the accounts up a house,preparing meals,raising children, and do-it- in Tables 10-1 and 10-2. There are no new entries for yourselfprojects. 16 Householdsare far more importantin current pollutioncontrol outlays,since these are already the modifiedaccounts. Especially in developingcountries, includedin the conventionalaccounting of costs.As noted householdsaccount for a substantialportion of environ- above, however,it probablywould be useful to identify mental damageto water because of direct dischargesof these costs separately,as has been done by the Bureauof sanitarywastes." 7 EconomicAnalysis (U.S. Department of Commerce)since Householdsare unique amongthe producingsectors in 1972. that most of the environmentaldamage caused by households (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 damageoutside their ownsectors. containsthree new entries that would ordinarilybe ab- sent from a conventionalaccount of the industry'sinputs and outputs.In addition,capital consumption allowances Nature includenatural resource and environmentaldepreciation as wellas ordinarydepreciation. Item 10 is an accounting The modifiedaccounting system differs most markedly of the environmentalservices, and item 15 is an account- fromthe conventionalsystem in its inclusionof 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,including other busi- primarysource of all environmentalasset servicesand as nesses. Becausethey are "free," environmentalservices 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 environmentaldamage. For example,a large differencebetween items 15 and 10. It ensures that the portion of dissolvedsolids in water have a natural origin, modified accounts balance. Since it is defined as the and, on average,naturally generated particulatesand ni- differencebetween the servicebenefit of the environment trogen oxides (other than NO2) greatly exceed the man- and the disbenefitof environmentaldamage, it has been made productionof these air pollutants. named net environmentalbenefit." 5 The modifiedindus- Althoughsome may have a philosophicalobjection to 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 value of for practical reasons. Availableestimates of damages environmentaldamage. 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 As is suggestedby the abovediscussion of tne standard more accurate to prorate the damagesbetween the two national accounts, the conventionalgovernmental prod- sources. 74 HenryM. Peskin

Table 10-3. Industrial ProductAccount for a Typical Sector (I) Input Output 1. Purchasesfrom other industrialsectors 12. Salesto privatesector (currentaccount) 2. Compensationof employeesand proprietors(incl. a. To other industries rental income) b. To households 3. Profitsafter inventoryvaluation and capitalcon- c. Exports sumptionadjustment 13. Salesto government 4. Net interest 14. Salesfor grossinvestment 5. Imports 6. Transferpayments 7. Indirecttaxes 8. Subsidiesreceived (-) 9. Capitalconsumption allowances Gross industrial sector input Gross industrial sector output 10. Environmentalservices (-) 15. Environmentaldamages (-) 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 a. 1.15,L10, and so forth,means item 15, item 10, and so forth,account I.

Table 10-4. GovernmentalProduct Account (II) input Output 1. Purchasesfrom industry(1.13) 7. Governmentalgoods and services 2. Compensationof employees 3. Imports Governmental input Governmental output 4. Environmentaldepreciation 8. Environmentaldamages (-) 5. Environmentalservices (-) a. Air a. Air b. Water b. Water c. Land c. Land 6. Net environmentalbenefit (11.8-11.5) Modified governmental input Modified governmental output

Table 10-5. HouseholdProduct Account (III) Input Output 1. Purchasesof intermediategoods fromindustry 8. Servicesto households (1.12.b) a. Nonprofitinstitutions 2. Compensationof empLoyeesand proprietors b. Domestics 3. Imports 4. Surplusof nonprofitinstitutions 5. Capitalconsumption allowances Gross household input Gross household output 6. Environmentalservices (-) 9. Environmentaldamages (-) 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 Accounts Framework 75

Table 10-6. Natural Account (IV) Input Output 1. Environmentaldamages (including those naturally 2. Environmentalservices generated) 3. Net environmentalbenefit 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 ignore 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 GNP unchanged. 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 accounts on the grounds that such modifications destroy count are eliminated. Also as before, househo'lds are 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 viewed as the source of environmental Inspection of the modified consolidated account indi- services and the consumer of environmental damages, the cates that modified GNP equals conventional GNP less en- proposed accounting framework does not vievwnature 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. ConsolidatedNational Income and'Product Account (V) input Output 1. Compensationof employeesand proprietors(incl. rental 14. Personalconsumption (1.12.b + 111.8) income)(1.2 + 11.2+ 111.2) 15. Grossprivate domestic investment (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. Governmentalgoods and services(11.7) National income 5. Transferpayments (1.6) 6. Indirecttaxes (1.7) 7. Subsidies (-) (1.8) 8. Statisticaldiscrepancy 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 + 11.8+ 111.9+ 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 followingnotation is first defined: the first three, since the relation between the environment and conventionalGNP has alreadybeen discussed. VA = chargesagainst conventional GNP or value added GNP = conventionalGNP Option 1: GNP' = GNP - ED GNPi= modified GNP, definition i (i = 1, 2, 3, or 4) ES = environmentalservices It was demonstrated above that the conventionalac- NEB = net environmentalbenefit count aggregatesdo not alwaysrespond to changes in ED = environmentaldamage. environmentalquality in a manner that wouldmake these aggregatesacceptable indicators of well-being.GNP tended Sincethe left- and right-handsides of the consolidated to increasewith environmentaldeterioration, and efforts accountsmust balance,the followingidentity holds: to improvethe environmentare often reflectedby reduc- (6) VA - ES + NEB = GNP - ED. tions in GNP, particularlyif these effortswere undertaken Asno,thisidentity implies the followingdefinition by reallocatingbusiness current account inputs or shifting As noted,GNP investment.Clearly, the abovedefinition of modifiedGNP of modifiedGNP: seems to perform much better as an indicator of well- (7) GNPI = GNP - ED. (Definition1) being. GNP' appears to move correctly with respect to changesin ordinaryGNP and to changesin environmental Accountingarrangements are somewhatarbitrary, how- quality.Perhaps this is why this modificationto conven- ever, and other arrangementsare possibleas long as the tional GNP was recommendedby Olson (1977).Yet, this accountsbalance. For example,by adding ES and ED to first definitioncovers only part of the environmentalre- both sides of equation 6 and noting that NEB = ES - lation. The seconddefinition covers another part. ED, a newidentity can be formed:

(8) VA + ES = GNP + ES Option2:GNP'=GNP+ES whichleads to a newdefinition: The theoreticalanalysis behind the suggestedmodified accounting frameworkdemonstrated that there was a beneficial environmental service associated with any ob- Similarly,adding Es and EDto both sides of equation 6 served environmentaldamage. This service, being un- andagain notingthat NEB = ES -lED producesa t1iird priced and apparently"free," does not showup directly adagin n notingta GNEr in conventionalGNP. definitionof modifiedGNP: The second definition directly accountsfor this unpricedinput. Its use as an indexof well- (10) GNP3 = GNP + NEB. (Definition3) being would have interesting and perhaps controversial implications.For example,the differencein incomebe- Finally,first adding ES to both sides of equation6 and tween an unindustrial,developing society in a tropical then subtractingNEB from both sides producesa fourth climatethat generatesenvironmental services in the form of warmth and abundant, freely availablefood and an (ll) GNP4 = GNP. (Definition4) industrialsociety in a cold climatethat requiresa highly sophisticatedagricultural system may be far less if income 2 Thus, modifiedGNPcanbe definedalternatively as con- is measured by GNP, rather than ordinary GNP. (The ventionalGNP less environmentaldamage, as conventional differencemight also be less under the first definitionif GNP plus environmentalservices, as conventionalGNP pIus the industrialsociety were also the more polluted.) net environmentalbenefit, or simplyas equal to conven- However,GNP 2 is prone to possibledouble countingof tionalGNP. These definitionsare by no meansequivalent, environmentalservices consumed by business.While these but they are all consistentwith the modifiedaccounting servicesmay not be accountedfor directly,they may be structure discussedabove. The pros and cons of these reflectedin profits, which are captured by 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 disposalservice may show up as an increased profit rate for the business. For the national The relation between the modifiedaccounts and the accountantto add in an amountequaling the valueof the environmentcan be discussedin terms of the modified ocean servicewould, in this example,be superfluous. GNPconcepts defined in the previoussection. Since the One interesting aspect of GNP2 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 ProposedEnvironmental Accounts Framework 77 declinesdepending on whetherthe expenditureby busi- dualityand the fact that the benefits of pollution reduc- ness is on capital or current account and on whether tion are rarely gained withoutcost: some portion of the capital outays for pollution control divert capital from benefitsof environmentalservices usually have to be for- more productiveuses. Assumingfull employment,how- gone. ever,GNP 2 willalways decline as pollutionconbtol expen- As noted from Table 10-7, in this frameworkenviron- ditures increase.According to the theorybehind the mod- mentaldepreciation modifies only NNP, but not GNP. For ifiedframework, pollution control expenditures 'meam that this reason environmentaldepreciation was neglectedin marketed goods and services are being substituted for the foregoingdiscussion of modifiedGNP concepts. Since environmentalservices. Thus, since ES willdecline, GNP 2 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 with the potentialfor double counting,makes CNP 2 a less all the previous discussionin terms of NNP. By simply desirableindicator of well-beingthan GNP'. However,its subtractingcapital consumptionallowances and environ- focus on the benefitsof Esis a strongpoint in its favor. mentaldepreciation (items 10 and 11 in Table10-7) from both sides of equations6 through 11, all the conclusions Option 3: GNP3 = GNP + NEB = GNP + ES - ED can be restated for NNP.Thus, for example, NNPI = NNP - ED, NNP2 = NNP + ES, and so forth. The above This definitionof modifiedGNP appears to be a com- inequalitieshold as well. promisebetween GNP' and GNP2 and shares the strengths and weaknessesof both measures.As an indicatorof well- Notes being it appears to move in the correct direction: increasesin ES and decreasesin ED implyincreases in GNP3. 1. Environmentalmanagement theory has found its wayinto Yet there are some circumstances under which GNP3 has severaltexts, but one ofthe best expositionsis the seminalbook difficultyin movingin any direction. In the absence of by Kneeseand Bower(1968). technologicalchange, decreases in environmentaldamage 2. Simpleinput-output models, which view pollution as a by business, ED, must invariably be accompanied by de- by-productproduced in fixed proportion to salable product, creases in environmentalservices to business,ES. Thus, neglectthis importantprinciple. The earliestexample of such a under policies of pollution control, NEB may remain es- modelis Leontief(1970). 3. Both direct and 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. Marginalvaluations equal total valuationsless 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 decompositionof value depreciationrequires that 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 availabilityof 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 providesonly one service-drinking wa- piece of valuable policy information. As described above, ter-and not a waste disposalservice. if the marginal ifvaluationsvluatins th margnal ofOfEs ES andan ED areae thethesame7. same seRglsadRgls(96For a more detailed discussion90 of n accountingeatetoconcepts, (neglecting the minus signs), the allocation of the services Commercesee Ruggles(1954). and Ruggles(1956; 1970) and U.S.Department of 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)would also appear on the right- neglected), an optimum allocation occurs wherl ES = ED hand side of the consolidatedaccount and net interest on the or, equivalently,when NEB equals zero or when GNP3 = left-handside. GNP. If NEB were negative or GNP3 < GNP, well-being 9. One implicationof this householdproduction is that many would improve if ED were decreased. Such a policy rec- consumer goods are really intermediate in nature and thus ommendation to reduce environmental damage would not contributeonly indirectlyto well-being.See Hirsch (1976)for a be very controversial. However,the analysis also indicates good discussionof this issue. that ifNEBwerepositive,orGNP'> GNP,theremay10. This statement assumesthat the economywill remain that lif NEB were positlve, or GNP > GNP, there may be fully employedin 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 environmental damages. GNP3 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.Accounting for SlowerEconomic Growth. Wash- must be reduced. ington,D.C.: The BrookingsInstitution. 12. See Christiansenand others (1980) for a summaryof . 1979b."Explanations of DecliningProductivity Growth." estimatesof the effect of pollutionregulation on the economy. Survey of CurrentBusines 59(8, part 2, August):1-24. 13. To avoid double counting, these damages should be Fisher, Irving. 1906. The Nature of Capitaland Income. New measurednet of damagesalready reflected in any reduced pro- York:Macmillan. ductioncaused by pollution-relatedproductivity losses (for ex- Hirsch,Fred. 1976.Social Limits to Growth.Cambridge, Mass.: ample,effects of air pollutionon workerhealth). (Robert Rep- HarvardUniversity Press. petto calledattention to this point.) 14. This sectionis based on Peskin (1976)and Peskin and Johnson,Harry G. 1975. On Economicsand Society.Chicago, Peskin(1978). Ill.:University of ChicagoPress. 15. Net environmentalbenefit is shownas the differencebe- Kneese, AllenV., and Blair T. Bower.1968. ManagingWater tween the environmentaldamages entry and the servicesentry. Quality:Economics, Technology, Institutions. Baltimore, Md.: Sincedamages and servicesare entered negatively,however, it Johns HopkinsPress for Resourcesfor the Future. actuallyis equal to the absolutevalue of the servicesless the Leontief,Wassily. 1970. "EnvironmentalRepercussions and the absolutevalue of the damages. EconomicStructure: An Input-OutputApproach." The Re- 16. The one majornonmarket activity associated with house- view of Economicsand Statistics52(3, August):262-71. holds that is includedin the accounts-the imputationfor the Marshall,Alfred. 1920. Principlesof Economics.8th ed. Lon- implicitrents from owner-occupiedhousing-is includedin the don: Macmillan. businesssector. Olson,Mancur. 1977. "The Treatmentof Externalitiesin Na- 17. In the modifiedsystem, sewered households are not con- tional IncomeStatistics." In LowdonWingo and AlanEvans, sideredto pollutethe environment.Sewered wastes are consid- eds., PublicEconomics and the Qualityof Life. Baltimore, ered inputs to municipaltreatment works, an industrialsector, Md.:Johns HopkinsUniversity Press for Resourcesfor the whichis creditedwith any resultingenvironmental damage. Future. Peskin,Henry M. 1976. "ANational Accounting Framework for References EnvironmentalAssessments." Journal of EnvironmentalEc- onomicsand Management2(4, April):255-62. Ayres, Robert U., and Allen V. Kneese. 1969. "Production, - . 1989. "Accountingfor Natural ResourceDepletion and Consumption,and Externalities."American EconomicRe- Degradationin DevelopingCountries." Working paper 13. view 59(3, June):282-97. EnvironmentDepartment, World Bank, Washington,D.C. Christainsen,Gregory, Frank Gollup,and Robert H. Havemnan. Processed. 1980. "Environmentaland Health-SafetyRegulations, Pro- Peskin,Henry M., and Janice Peskin. 1978. "The Valuationof ductivityGrowth, and EconomicPerformance." Assessment NonmarketActivities in Income Accounting."Review of In- report preparedfor the Officeof TechnologyAssessment and comeand Wealth24(1, March): 71-91. the Joint EconomicCommittee of the U.S. Congress.Froc- Ruggles,Nancy D., and RichardRuggles. 1956. The Designof essed. EconomicAccounts. New York: ColumbiaUniversity Press Data Resources, Inc. 1979. "The MacroeconomicImpact of for the NationalBureau of EconomicResearch. Federal PollutionControl Programs: 1978 Assessment." Re- Ruggles,Richard, and Nancy D. Ruggles. 1970. NationalIn- port submittedto the EnvironmentalProtection Agency and come Accounts and Income Analysis. New York: McGraw- the Council on EnvironmentalQuality, Washington, I).C. Hill. Processed. U.S. Departmentof Commerce.1954. NationalIncome, 1954 Denison,Edward F. 1971. "WelfareMeasures and the GNP." Edition. Supplement to the Survey of Current Business. Survey of CurrentBusiness 51(1, January):1-8. Washington,D.C.: U.S. GovernmentPrinting Office. EnvironmentalAccounting and the System of NationalAccounts

Peter Bartelmus

An important outcome of the 1972 U.N. Conferenceon less clear how "sustainability"can be defined operation- the HumanEnvironment in Stockholmwas to affirmthat allyso that indicatorscan be developedthat signalsignif- environmentalproblems are caused by highlyaccelerated icant deviationsfrom the sustainable path of develop- economicgrowth as well as by activitiesinduced by an ment.' It appears that politicians in most countries actual lack of development.A broader viewof environ- continue to base their decisionson the assumptionthat mental damage was also advanced,which included, be- overalleconomic and social welfarerises and falls with sides the dischargeof toxic substances,the degradation the popularmacroindicators of gross domesticor national and depletion of natural resources. An integrated and product, GDP or GNP. In fact, these indicatorsare usually coordinated approach to developmentplanning, which taken to moveparallel with aggregateincome, which is includedsafeguarding the natural resources of the earth obtainedby making an allowancefor 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 produced capital is concerned, an (UnitedNations 1973). elementof sustainabilityis thus introducedin the defini- Eight years later the WorldConservation Strategy ad- tion of nationalincome. This approachreflects the Hick- vocated the "achievementof sustainable development sian view of income as a practical guide for prudent throughthe conservationof livingresources" as its basic conducttoward consumption, which should not exceed a aim (IUCN1980). The InternationalDevelopment Strategy certainlimit beyond which a person or a populationwould for the Third U.N.Development Decade also referred to be impoverished(Hicks 1946, p. 172). the "need to ensure an economicdevelopment process The concept of capital maintenancehas not been ex- whichis environmentallysustainable over 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 session the U.N. GeneralAs- degradationand depletionof the naturalenvironment and semblycalled upon the World Commissionon Environ- its resourcescontribute to illusionaryincome flows that ment and Developmentto proposelong-term environmen- cannot be maintainedin the long run. Moreover,expen- tal strategiesfor achievingsustainable development by the ditures by governmentor householdsfor "regrettable" year 2000 (UnitedNations 1984b).Accordingly, sustaina- measuresto counteractdeteriorating environmental con- ble developmentis the all-pervadingthemre of the Com- ditions actuallyincrease national product and income. mission'sreport (WorldCommission 1987). Measuresof economicwelfare were therefore advanced Althoughthere is generalagreement on the desirability that purported to correct the misclassificationof regret- of sustainable economicgrowth and development,it is table expendituresas final and that made allowancesfor important nonmarket activities,environmental degradation, and the depletionof natural resources.Best known are perhaps the pioneeringefforts by Nordhaus and To- Note: The authoris a staffmember of the UnitedNations. bin (1972),made popular by Samuelson'stextbook as Theviews expressed here arehis ownand notnecessarily those "net economicwelfare" or NEW (Samuelson1980, p. ofthe UnitedNations. 183).

79 80 Peter Bartelmus

At the request of the U.N.Committee for Development Europe took the initiativeto developa systemof environ- Planning,the U.N.Statistical Office (UNSO) criticallyre- ment statisticsthat would complementthe already exist- viewedthe concepts,methodologies, and empiricalappli- ing systems of economic statistics (the SNA) and social cations of these measures. The review concludedthat and demographic statistics (the System of Social and considerableconceptual and measurementproblems make DemographicStatistics, SSDS) (United Nations 1975). It estimatesof the value of environmentaldamage "essen- soon becameapparent, however,that the currentstate of tially exercisesfor multidisciplinaryresearch and experi- knowledgeabout the environmentand its statisticalmeas- ments, not for routine collectionof statistics,"and that urement, as well as widelydiffering environmental con- difficultiesof agreeingon the scope, concept, and meas- cerns and priorities, did not permit an internationally urementof welfarewould render such approaches"inap- applicablestatistical system to be established.Therefore, propriate for official and especiallyinternational use" under the guidance of the U.N. Statistical Commission (UnitedNations 1977b, pp. 54 and 66). The environment and with the financialsupport of the U.N. Environment statisticsprogram of the UNSO focused,therefore, on de- Programme(UNEP), the UNSO developeda flexibleFrame- velopingphysical statistics and related indicators (see work for the Developmentof Environment Statistics "EnvironmentStatistics," below). A significantlimitation (FDES)(United Nations 1984a). Since the FDES itselfdoes of such data is that they lacka commonnum6raire, which not recommendstatistical definitions and classifications, would permit aggregation across broad sectors of the no direct linkagethrough commonconcepts and classifi- environment.Despite its limitations,GDP thus continues cationswas establishedwith the SNA or other statistical to be the main indicatorof economicsuccess or failure. systems.2 The joint UNEPIWorldBank workshopsset out, there- The FDESis currentlybeing expandedinto a series of fore,to reexaminethe feasibilityof physicaland monetary technicalreports on "Conceptsand Methodsof Environ- accountingand concentratedon the fieldof environment ment Statistics,"which willpropose definitionsand clas- and natural resources. This field appeared to be better sificationsfor statisticalvariables and indicators of high researchedand easier to assess than the wholegamut of priority.Because these statistics includeindicators of re- welfareeffects originally addressed by economicwelfare source depletion and environmentaldegradation, their measures.A consensusemerged in the workshopsthat use for establishingresource and environmentalaccounts enoughprogress had been achievedto link environmental in physicalterms willbe addressedspecifically in a report accountingto the standard Systemof NationalAccounts on "Statisticsof the Natural Environment."These meth- (SNA) (UnitedNations 1968) and to include certain as- odologieswill be applied at the regional and national pectsof environmentalaccounting in the ongoingrevision levelsin a GlobalProgram of EnvironmentStatistics (U.N. of the SNA. This chapter examinesthe treatmentof envi- StatisticalCommission 1987, p. 29). ronmental issues in the SNA and reviewsthe main approachesto resource and environmentalaccounting for Materials/EnergyBalances possiblelinkage or integrationwith the SNA. Closelinkage to the SNAhas been attempted in more Environment Statistics and Physical Accounlting selectiveapproaches to accountingfor flowsof materials and natural resources.The uNso developeddraft guide- The close interactionsamong environment, population, lines for statistics on materialslenergybalances (MEB), naturalresources, and developmentrequire an integrated whichwere seen as a module of 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- purpose of the MEB is to trace the extraction and trans- nomic,and environmentaldata. On the one hand, envi- formationof materialsand energyfrom natural resources, ronment statistics systemsattempt 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, fromof surcemulitud andto prsentthemin a alternatively,to secondaryuse. Compatibilitywith the SNA coordinatedmanner in statisticalcompendia such as year- iseacived b usindits ustandrdpatebolessuch 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 objectiveof and its classificationof economicactivity. Contrary to the resourceaccounts and balances. conceptsof market transactionsand monetaryvaluation used in national accounting,physical stocks and flows and materials/energytransformation processes are pre- Environment Statistics sented in such balances. The U.N.Statistical Commission considered the MEB to At the internationallevel, the Conferencefor European be an interestinglong-term approach, but too ambitious Statisticians(CES 1973)of the EconomicCommission for for short-termimplementation because countries still lack Environmental Accounting and the System of National Accounts 81 the necessarystatistical capabilities. As a consequence, mony"approach is more ambitiousin its attempt to in- only the energy part of this approachwas further devel- clude ecologicalprocesses that are not directly affected oped in balancesthat showenergy flows from the produc- by human intervention,that is, interactions among the tion of primaryenergy, through conversionprocesses, to physicalcomponents of the environmentand its biota the stage of finalconsumption (United Nations 1988). (INSEE 1986a;see also Theys, Chapter 7). A work programto standardizedefinitions and termi- nology for mineral resources was initiated by the U.N. Environment and Natural Resources in the SNA Committeeon NaturalResources and later transferredto the Statistical Commission.The commissionrequested Commonto all the above approaches is the use of the UNSO to further developmineral consumption statis- physical units, which permits aggregation only in very tics and raw materialbalances (includingthe 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 frameworkassess 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 developmentpolicies (Repetto 1986). To calcu- In focusingon processesof resourceflows through the late overallmeasures of economicperformance, a com- economicsystem, the MEB can also be consideredas a mon numeraire,such as the monetaryunit of national physicalextension of the input-outputtables of national accounting,is needed. Therefore,aspects of the environ- accounting.These models can incorporateresource re- ment that are alreadycovered by the SNA are examined quirementsand wasteresidual outputs, which reflects the belowbefore any further methodologiesof monetaryen- fact that the materialsienergyinputs and outputs for the vironmentalaccounting are described. economymust alwaysbalance. However, detailed classificationsof productionprocesses that providefor a further Flow Accounts breakdownof the relativelyheterogeneous classification by industries would be needed to obtain more stable The basic objectiveof the SNA is to provide"a compre- technical coefficientsof resource use, production, and hensiveand detailed frameworkfor the systematicand residuals. integratedrecording of the flowsand stocks of an econ- Although the SNA provides for the full integrationof omy"(United Nations 1968, p. iii).No explicitreference input-outputtables, country tables were oftenicompiled to the environmentor natural resources is made in any separatelyfrom national accounts because they focused of the core flowaccounts described in the "blue book" of on specificanalytical uses. A future handbookon input- the SNA. Variousactivities listed in the internationalstan- output statistics and the current reviewof the SNA as a dard industrialclassification (isic) refer, however,to the wholewill address problems of 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 portation as well as to the environmentallyrelated serv- with natural resourceand energyflows or pollutionproc- ices of housing and sanitation. Similarservices are also esses in the input-outputsystem. reflectedin the classificationof governmentexpenditures by purpose. Since the cost of land improvementis in- ResourceAccounting cludedin grosscapital formation, this conceptalso covers transactionsdealing with selected natural resources. In none of these conceptsand classifications,however, are A few countries with well-developedmonitoring and environmentaltransactions clearly identified. They are data collectioncapabilities have turned to a somewhat typicallylumped together with other nonenvironmental simplifiedphysical accounting approach. The basic objec- transactions.Moreover, certain environmentalexpendi- tive of resourceaccounting systems is to pirovidea coher- tures are treated as finalwhere they actuallyrepresent a ent picture of resource use and depletion or increase, cost to society(see "EnvironmentalCosts and Expendi- which can be linked to, or integratedwith, the national tures," below). accounts.Norway's resource accounts concentrate on selected natural resources and extend the SNA balance BalanceSheets and ReconciliationAccounts sheets to cover the total stock (includingnonmarketed stocks) of the respectivenatural resources in physical To date national efforts have largely focused on the units (StatistiskSentralbyra 1987). The French "patri- accountingof flowsor transactionsto the neglect of the 82 PeterBartelmus stocks presented in balance sheets. This occurs despite particularlyrelevant for environmentalanalysis: natural the fact that balancesheets form an integral part of the growthless depletionof timber tracts, forests,and fisher- SNA, linked to its flowaccounts through capitaltransac- ies; new finds less depletionof subsoilassets; and losses tion and reconciliationaccounts. There has been growing in land and timber tracts in catastrophesand natural interest, however,in measuringnational wealt&and, in events.Changes in land qualitydue to erosion,waterlog- particular,its tangibleaspects, a significantpart of which ging, desertification,or upgradingand increased availa- is madeup of assets of the manmadeand naturalenviron- bilityof mineralresources due to technologicaladvances ment. are not shownseparately. They are recordedas changes Followinga recommendationof the "blue book," the in the market value of land and subsoilassets as part of UNSO issued detailed guidelineson balance sheet and the revaluationitem of the reconciliationaccounts. All reconciliationaccounts within the frameworkof the SNA these items are excluded from the capital transaction (UnitedNations 1977a). The guidelinesdistinguish be- 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 nonreproducibletangible assets of natural resourcesand historical monuments.The classificationof stocks and As alreadydiscussed, physical indicators and accounts fixed assets presents important aspects of the manmade cannot be aggregatedinto overallmeasures of resource environmentand lists buildingsand infrastructuralworks depletionand environmentaldegradation. Consequently, as part of fixed assets. The measurementof the availa- they cannotbe compareddirectly with the standardmeas- bilityand use of natural resourcesand the assessmentof ures of economicperformance to assess the sustainability relatedenvironmental problems are consideredto be some of economic growth or development.For this reason, of the main uses of the classificationof nonreproducible physicalmeasures have not 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 limit its ing and its main aggregatesin formulatingand evaluating scope mainlyto market activities(except for imputations national plans and policies, various environmentalac- for directlycompetitive nonmarket activities), natural re- counting approaches attempted to tackle the issue of sourcesin the publicdomain are excluded.This category sustainabilityand environmentaldegradation within, or as includesrivers, lakes, parklands,unused wilderness, and close as possibleto, the establishedsystems of national the atmosphere,which are not subjectto ownershiprights accounting. and are thus generallynot sold or purchased.Outlays on Mostof these approachesfavor the direct adjustmentof 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 politicians and administratorsto reproducible tangible assets (as "other construction base their plansand decisionson a conceptof sustainable works"or "landimprovement") of the balancesheets. But income,which accountsfor the total cost of destructive no capital consumptionis charged againstthese outlays. and wastefuluses of the environment and natural re- However,the total initial expenditurefor naturallygrow- sources.During the current revisionof the SNA, however, ing but commerciallytraded 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 counted as 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 "reconciliationaccounts" (see below). users of the systemand on improvingits consistencywith Balance sheet accounts are linked to the SNA flow other internationalstandards of statistics.A possiblecom- accounts by capital finance accounts, which portray a promise(suggested below in "Future Work")is to elabo- significantpart of the changesbetween opening and clos- rate the different methodsof environmentalaccounting ingassets and liabilities.There are, however,several other in satelliteaccounts and tabulationsof the SNA.3 changes in assets and liabilities,such as revaluations, The followingreview of the main approachesdiscussed unforeseenevents, and, in particular, increases or de- in the uNEP/WorldBank workshopsillustrates the possi- creasesin nonreproducibleassets, which are not included ble contentsof satelliteaccounts. Three basic categories in the flowaccounts of the SNA. To coverall differences of environmentalaccounts are distinguishedaccording to betweenthe balancesheet accountsat openingand clos- the main environmentalconcerns addressed in the working dates, these changes are formallyintroduced in so- shops, namely accounts of environmentalcosts and ex- calledreconciliation accounts. penditures, natural resource capital, and environmental The followingitems of the reconciliationaccounts are services. EnvironmentalAccounting and the System of NationalAccounts 83

Environmental Costs and Expenditures investment,they increasedirectly national product or income. Governmentalexpenditures typically include out- The measurementof environmentaloutlays and, as far lays for environmental protection and remedy, while as possible,of resourcesor "incomings"of the principal householdsmight bear the cost of medicaltreatment for agents of the national accountingsystem has been pio- pollution-relateddiseases or the avoidance of environ- neered by France in "environmentalsatellite accounts" mental disamenities,for example,by resettlement.If en- (INSEE 1986b).Operating (running)costs or current out- vironmentalexpenditures are incurred by industry,how- lays are distinguishedfrom investmentand other capital ever, their current cost component is counted as formationexpenditures. One of the main problemsin this intermediateconsumption, which potentially decreases (in approach is to identifythe environmentalactivities for the case of full employmentof the factors of production) which outlays have been incurred. This problem exists industrialvalue added,that is, industry'scontribution to because the standard classificationsof the SNA were not national product. Capitalexpenditure for environmental designedto generate statistics on environmentalexpen- protectionby industryis treated, however,as finalexpenditure. diture and is thus fullycounted as an increaseof GNP. For governmentexpenditures, the classificationof the All these expendituresserve only to maintaina certain functionsof government(COFOG) does not yet contain a levelof environmentalquality or, in other words,to "de- categoryrelating to the protection of the environment, fend"society against the unwantedside effectsof produc- but it indicatesthat such a grouping may be 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 environmentalprotection is advance(dfor "fur- tainable Product and Expenditure,"below). Apart from ther examination."A draft classificationof outlaysof in- expendituresfor environmentalprotection and compen- dustriesby purpose (coip)was developed by the UNSO in sation for environmentaldamage, defensiveexpenditures 1975 but was not further discussedor promoted. It lists may also include other social costs of urbanizationand nine categories,one of which specifiesoutlays on pollu- industrialization,such as commutingcosts and provisions tion abatementand control. For this category,outlays for for environmentalhazards in industriesand the working "end-of-line"measures are said to be relativelyeasily al- environment(Leipert 1985). As already mentioned, it may located.However, the incrementalcosts of measuresthat be difficultto identifyseparately defensive costs in the are incorporatedin the productionprocess can be only case of combined measures that restore environmental estimated. For private nonprofit bodies serving house- conditionsand raise productivityor utility at the same holds, the SNA containsa classificationof purposescon- time. sistingof eight categoriesthat do not specifyenvironmen- The social restoration cost of meeting or maintaining tal purposes. For households,the SNA's classificationof environmental standards for safeguarding sustainable householdgoods and servicesmight eventuallybe linked economicdevelopment has been advancedas an indicator to a generaland more detailed central product classifica- that mightusefully supplement national product (Hueting, tion (cpc), which has been prepared by the tJNSO. One Chapter6). The indicatordescribes how far a nation has divisionof this classificationreflects environmental func- driftedfrom its desiredlevel of environmentalquality and tions in categoriessuch as "sewageand reiuse disposal" can thus be compared with the extent the nation has and "sanitationand similarservices." progressedin raising its level of production. Standards The developmentof functionalclassifications in the SNA for sustainabledevelopment could be set by decisionmak- that cut across sectoralboundaries and identifyexpendi- ers or by science, and appropriate measures to meet tures for environmentalpurposes would permit these ex- these standardscould then be formulatedand costed. For penditures to be aggregatedfor the whole field of the irreversiblelosses of renewableresources (extinction) or environmentand broken downby environrmentalprotec- for nonrenewableresources, the cost of developingalter- tion category.The aggregateof the total (finaland inter- native resources or facilities could be estimated. The mediate)environmental expenditure describes how much method of usingstandards has been proposedbecause of a nation has been willingto spend on environmental the difficultiesof devisingshadow prices for environmen- protectionduring the accountingperiod. T'hisaggregate tal functions(and their losses)that are directlycompara- also facilitatesinternational comparisons, since it is not ble with marketprices of produced goodsand services. affectedby differentinstitutional arrangements for envi- ronmentalpolicymaking and budgeting. Natural Resource Capital Functional classificationsof environmentalexpenditures can also be used to measure so-calleddefensive Most changesin the resourceassets of a country have expendituresincurred by the government,households, or been excludedfrom the standard flow accounts of the industryto counteractenvironmental degradation. When SNAbecause of the lack of reliable data and uncertainties such expendituresare counted as final consumptionor in estimation and valuationprocedures, particularly for 84 PeterBartelmus assets whosereturns are typicallyspread 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- commercialchanges are recorded separatelyin reconcili- ture's productionaccount (Peskin 1981). ation accounts,but these accounts have rarelybeen pre- The model claimsto be fully consistentwith the prin- pared and thus are largely neglected in policymaking. ciples of neoclassicaleconomics in measuringthe envi- Now,however, awareness of the unsustainabilityof income ronmentalaspects of socialwelfare. There are, however, resulting from the consumptionof finite natural assets considerableproblems in measuringand valuingnonmar has created new interest in accountingfor selected re- ket contributions from and to nature and in double sources in physicalaccounts and has also revitalizedat- counting the external economies and diseconomiesof temptsto assignmonetary values to the stocks and flows these contributionsthat are already reflectedas produc- of these accounts. tivitychanges in the productionaccounts. In principle, such accounts can be developedin har- monywith national accounting concepts by extendingthe Indicators of Sustainable Product and Expenditure SNA's balancesheets to coverfully natural resources such as water,forest, or wildlife,even if they havenol: been the The environmentalaccounts described aboveproduce object of commercialtransactions. Contrary to the prac- aggregatesthat can be used to modifythe valueadded or tice of reconciliationaccounts, the separate listing of the valueof gross productioncreated, and the amount of additions(discoveries, net revisions,extensions, growth, expendituresallocated for consumptionand investment or reproductions),reductions (extraction,deforestation, by those transactors of the economythat use or protect or degradation),and revaluations' in "national income ~~~~~~~~~~naturalresources and environmental services. Accord- accounts for natural resources" has been proposed to ingly,the followingnew conceptsof gross and net domes- record changes in the values of the stocks of natural tic product, incomeand expenditurehave been proposed resourcesduring the accountingperiod (Repetto 1986). .. .' Net changesin the value of the resourceposition can be estimatedfrom these accountsfor the calculationof sustainable incomeor product indicators.Other procedures SustainableNet Product and Expenditure to estimatethe depletionfactor in the calculationof sustainableincome include applyingdepreciation principles Correctingnational incomefor changes in the net re- to the stock of natural resourcesor calculatinguser cost source position,which is obtained from accountingfor allowancesfor their intermediateconsumption (see "Indi- depletion and the increase in the stock of natural re- cators of SustainableProduct and Expenditure,"below). sources, has been proposed for calculatingindicators of sustainable income or product (see "Natural Resource EnvironmentalServices Capital,"above). It has been argued,however, that geological discoveriesof natural resources can be neglected, The amount of environmentalexpenditures or costs since they do not reverse the 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 depreciationconcept were ex- of damagemay be higheror lowerthan the cost of repair- tended to the consumptionof natural capitalby resource- ing it. On the other hand, accountingfor environmental exploitingindustries, it wouldaccount sufficiently for sus- expendituresneglects the fact that pollutionis connected tainability in a measure of sustainable product (Daly, with both the benefits of using nature's disposal and Chapter 2). absorptionservices and the "disbenefits"resulting from The valuationof naturalresource stocks couldbe based lossesof these and other servicesthat benefitconsumers on the principle of replacementcosts or willingnessto directly.Contrary to defensiveexpenditures, these serv- pay. However,changes in the value of environmentalas- ices are not priced by the market system and are thus sets can result from both physicaldepreciation and capi- excludedfrom standard national accounts (see Peskin, tal loss or gain, as, for example,with increasinglyheavy Chapter 10). use of a naturalresource, such as the use of a waterbody The introductionof a natural productionaccount into for fishingand recreation.In theory,valuation of capital the nationalaccounting system was therefore suggested. loss or gain should be based therefore on the marginal Such an account would record environmentalservices benefitsof uses (Peskin,Chapter 10). (for example,waste disposal, cooling, and provisionof The extensionof the depreciationprinciple to the con- oxygenand nutrients)as output from,and environmental sumptionof natural capitalaffects the net value added of damage(in particularpollution effects) as input into, the industriesthat exploitnatural resourcesand thus the NDP. environment,with the balancerepresenting a net environ- In addition,defensive expenditures have been considered mental loss or benefit.Industry, government, and house- as intermediaterather than final consumption,and the hold productionaccounts receive nature's outputas "free" further deductionof such expendituresfrom net national EnvironmentalAccounting and the System of NationalAccounts 85 product has been proposed.This procedure wouldyield the exploitationof natural resourcesas intermediatecon- a new indicator,which has been termed "sustainableso- sumptionof differentproduction activities and deducting cial net nationalproduct" (Daly, Chapter 2). a correspondingamount from final demand as a change Such sweepingtreatment, however,loses track of the in "environmentalassets." 6 For estimatingthe amount of accountingidentity betweennational income(the sum of intermediateconsumption to be deductedfrom the gross valueadded created in production)and nationalproduct output of resource-exploitingindustries, the calculation (the value of final demand)because defensiveexpendi- of a so-calleduser cost allowancehas been advocated(El tures contain elements of both intermediateand final Serafy,Chapter 3). User costs calculationsavoid the diffi- consumptionand capitalformation. A new,imore system- culties of estimating physical or value depreciationby atic approachto dealingwith (deducting) defensive expen- allocatinga certain amountof the receiptsfrom extractive ditures has thereforebeen proposedin a draft SNA Frame- industriesto an actual (Ward1982) or hypotheticalfund, work for EnvironmentalSatellite Accounting (Bartelmus which, if invested,would "create a perpetual stream of and van Tongeren1988). The idea is to reduce the pro- incomethat wouldprovide the same levelof true income, ductionboundary of the SNA by coveringonly nonenviron- both during the life of the resource as well as after the mental activities and thus excludingall production of resource has been exhausted" (El Serafy, Chapter 3). environmentalgoods (filters,chemicals, or wastedisposal Discoveriesare simplydealt with by changingthe para- plants)and services(protecting or restoringthe qualityof metersof the life expectancyof the resource,that is, the 7 the environment)that are used in intermediateand final resource-extractionratio. SGDE is derived from SGDP by demand.In this manner, value added and finaldemand deductingadditionally defensive expenditures of environ- are adjustedto obtain identicaltotal values. Further al- mental protection.An approach for deducting defensive lowancefor the depreciationof natural resource assets expenditureswithout violating accounting identities was then obtainsa measurethat couldbe termed "sustainable described above(see "SustainableNet Product and Ex- net national expenditure" (SNNE).5 penditure"). As an alternative,the joint UNEP/WorldBank Expert GroupMeeting in Paris (November1988) suggestedap- plyinga widerconcept of depreciationto calculate"envi- ModifiedGross or Net Product ronmentallyadjusted net domesticproduct." 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- depreciationof environmentalquality could be estimated ducing a natural production accountthat modifiesgross as the differencebetween actual defensiveexpenditure output in the productionaccounts. This procedure would and the cost of restoring environmentalqluality to the yield a "modifiedgross nationalproduct" (Peskin, Chap- levelat the beginningof the accountingperiod (in other ter 10). Deducting environmentaland other economic words,"potential" defensive expenditures). However, such depreciationfrom this aggregateproduces a "modified a procedure neither accounts for the "inflation"of NDP net domesticproduct," which wouldaccount for environ- by defensiveexpenditures nor reflectsactuali environmen- mentaldegradation as well as resourcedepletion. Consid- tal degradation or damage. Clearly, monr research is erable problemsof measuringand valuingenvironmental needed to clarify the relations between damage costs servicesand damageswill probably make the estimation (expenditures)and actual damage as well as their impli- of these indicatorsthe object of research studies rather cationsfor environmentalaccounting. than of routine compilationin environmentalaccounts.

SustainableGross Product 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-knowndifficulties of estimatingdepreciation. concernwith the sustainabilityof current patterns of pro- Therefore,GDP has usually receivedmore attention in duction and consumptionhas raised doubts about the economicplanning and policy,under the assumptionthat suitabilityof standardaccounting and its main aggregates the grossand net indicatorsmove similarly civer time. The for integratedsocioeconomic and environmentallysound 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 Environmentand Developmentdrew attention to "sustainablegross domesticproduct" (SGDP')or "sustain- the need to shift emphasisfrom the standardenvironmen- able gross domesticexpenditure" (SGDE). tal policyof dealingwith environmentaleffects after they The draft SNA Frameworkfor EnvironmentalSatellite occurredto "an approach concentratingon the policies Accountingproposes to calculateSGDP by accountingfor that are the sources of those effects"(World Commission 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 "overallframework for statisticalintegration." ing standard System of National Accounts, the SNA. The 3. The term "satelliteaccounts" is used here in a broad sense ongoinofrevision the SNA provides a unique opportunity to include,besides outlays and financialresources for environ- to examine how the concepts definitions classifications mental protection (as presented in environmentalsatellite ac- t examinehow the concepts, definitions, classifications, counts in the narrowsense; see, for example,INSEE 1986b), and tabulations recently developed in the fields of envi- costs and benefitsof environmentalimpacts and 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 modificationsapply also to nationalprod- ment it might be premature, however, to radically change uct and income(adding net factor incomefrom abroad);these a well-established system of data collection and account- indicatorsare less frequentlyused, however,and, unless other- ing that serves many different short-, medium-, and long- wiseindicated, reference is made to domesticproduct only. term socioeconomic analyses.8 Therefore, standards for 5. Even though accountingidentities are maintainedby this environmental and resource accounting should be further procedureof deductingdefensive expenditures, several assump- elaborated in a satellite system of environmental accounts tions make the meaningof SNNE somewhatambiguous, espe- of the SNA. Efficient linkage will require some amend- ciallyfor ex-anteanalysis. The first assumptionis that environ- ofnts thetoS eicien clnkagewio rsmexand-ll mental production is not replaced by nonenvironmental ments to the existing classifications as well as explana- production.This is realisticonly if SNNE is to reflect the aggre- tions of, or cross-references to, alternative concepts and gate value of nonenvironmentalincome ex post. If it is to tabulations in the core recommendations of the SNA. approximatepotential income, however, and refer to a situation A first draft of the SNA Framework for Environmental free of environmentaldistortions, one could assumethat factor Satellite Accounting was discussed by the joint UNEP/ inputsreleased from environmental production would have been World Bank Expert Group Meeting on Environmental used to generate additional income. In addition, the above Accounting and the SNA, and several recommendations definitionof defensiveexpenditures does not account for indi- were made. rect effects,that is, the employmentof nonenvironmentalgoods and services in the supply of goods and services related to * The revised SNA should provide a place for environ- defensiveexpenditures. 6. Changesin environmentalassets introducea new element mencstal faccntswthinathe overtallsymem and shoduld into final demand,which replacesthe conceptof capital accu- discuss the fact that conventional income anc, product mulationwith a newconcept of "changesin tangiblewealth." measures do not reflect environmental degradation and 7. Another possibilityis 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-accountcapital 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 (UnitedNations 1986, p. 6). stocks should be listed in the form of an inventory that may include indicators of physical quantity and quality. References * A first step toward measuring sustainable income and product should be to deduct the depletion and deg- Bartelmus,Peter. 1987a. Accountingfor Sustainabl Develop- radation of environmental assets; further research on de- ment. WorkingPaper 8. New York:United Nations, Depart- ducting defensive expenditures is required. ment of InternationalEconomic and SocialAffairs. . 1987b."Beyond GDP: NewApproaches to AppliedSta- The meeting also suggested that further work be un- tistics." The Reviewof Incomeand Wealth33(4) (December): dertaken toward a draft manual through pilot-l:ypecase 347-58. studies and the evaluation of existing resource accounting Bartelmus,Peter, and Jan van Tongeren. 1988. "SNA Frame- systems in industrial countries. The uNso has included workfor EnvironmentalSatellite Accounting." United Nations the preparation of a handbook on environmental satellite StatisticalOffice, New York. Processed. accounting in its work program and will collaborate closely CES(Conference of European Statisticians).1973. "Report of with the World Bank, UNEP,and other organizations in the Meetingon Statisticsfor EnvironmentalStudies and Pol- this effort. icies,"cEsIAC.4015), March 19-23, Geneva.Processed. EnvironmentalAccounting and the System of NationalAccounts 87

Hicks, J. R. 1946. Valueand Capital.2nd ed. Oxford,U.K.: - . 1976. "DraftGuidelines on Materials/EnergyBalances." OxfordUniversity Press. Report of the SecretaryGeneral on EnvironmentStatistics. INSEE(Institut National de la Statistiqueet des EtudesEcono- EICN.3/492.New York. Processed. miques). 1986a. Les comptes du patrimoine naturel. Les - . 1977a. ProvisionalInternational Guidelines on the Na- Collectionsde l'INSEE137-138C. Paris. tional and Sectoral Balance-Sheetand ReconciliationAc- . 1986b.Les comptessatellites de l'environnement,meth- counts of the System of NationalAccounts. E.77.XV11.10. odeset resultats.Les Collections de l'INSEE130C. Paris. NewYork. IUCN(International Union for Conservationof Nature and Nat- - . 1977b. The Feasibilityof Welfare-OrientedMeasures to ural Resources).1980. WorldConservation Strategy. Supplementthe NationalAccounts and Balances:A Techni- Leipert,Christian. 1985. "SocialCosts as a Factor of Economic cal Report.E.77.XV11.12. New York. Growth."Paper for the Conferencefor a New Economics: . 1980. Classificationof the Functionsof Government. The Other EconomicSummit, April 16-19, London;abbre- E.80.XVI1.17.New York. viatedversion: 1986. "From Gross to AdjustedNational Prod- . 1981. Resolutionsand DecisionsAdopted by the Gen- uct." In Paul Ekins, ed., The Living Economy:A New Eco- eral Assembly during Its Thirty-FifthSession. General As- nomicsin the Making.London: Routledge and Kegan. semblyOfficial Records, supplement 48 (Al35148).Resolution Nordhaus,W. D., and J. Tobin.1972. "Is GrowthObsolete?" In 35156:International DevelopmentStrategy for the Third NationalBureau of EconomicResearch, Economic Growth. UnitedNations Development Decade. New York. GeneralSeries 96. New York. . 1984a. A Frameworkfor the Developmentof Environ- OECD(Organization for EconomicCooperation and Develop- ment Statistics.E.84.XVII.12. New York. ment). 1985. "Treatmentof MiningActivities in the System - . 1984b.Resolutions and DecisionsAdopted by the Gen- of NationalAccounts." Restricted draft, DESNI/85.4.Paris. eral Assembly duringIts Thirty-EighthSession. General As- Processed. semblyOfficial Records, supplement 47 (A138147).Resolution Peskin, Henry M. 1981. "NationalIncome Accountsand the 381161.New York. Environment."Natural Resources Journal 21:511-37. . 1986. "NationalAccounts and Balances:System of Na- Repetto, Robert. 1986. "Natural Resource Accounting for tional Accounts(SNA), Progress in the Revisionof the System Countrieswith Natural Resource-BasedEconom ies." Paper of NationalAccounts (SNA)." Report of the Secretary-General. for the UNEPIWorldBank Workshopon EnvironmentalAc- EICN.3/1978/5.New York. Processed. counting.World Bank, Washington, D.C. Processed. . 1988. Energy Balancesand ElectricityProfiles 1986. Samuelson, Paul A. 1980. Economics. 11th ed. New York: E.86.XVII.14.New York. McGraw-Hill. U.N.Statistical Commission. 1987. Report on the Twenty-Fourth StatistiskSentralbyra. 1987. Natural Resource Accounting and Session.E/1987119. New York. Analysis:The NorwegianExperience, 1978-198f. Oslo. Ward,Michael. 1982. "Accountingfor the Depletionof Natural United Nations. 1968. A System of National Accounts. Resourcesin the NationalAccounts of DevelopingEcono- E.69.XVII.3.New York. mies." CD/R(82)3010.OECD, Paris. Processed. . 1973.Report of the UnitedNations Confermnce on the World Commissionon Environmentand Development.1987. Human Environment, Stockholm, June 5-16, 1972. Our CommonFuture. Oxford and New York:Oxford Univer- E.73.11.A.14.New York. sity Press. -. 1975. Towarda System of Social and Demographic Statistics.E.74.XVII.8. New York. 12

RecentDelopments and FuhureWork

Ernst Lutz and Salah El Serafy

The Systemof NationalAccounts (SNA) that is currently defensiveexpenditures and the depletionand degradation in use is based on a document published more than of natural resources. twentyyears ago (UnitedNations 1968). A revisionof 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 * Discussand, as soon as feasible,decide whichexpen- how improvementscould be made with as little distur-' bance tmprovthemcored systemadewit posbleitheas rvisi dituresare to be includedunder "defensiveexpenditures" bance to the sNA core system as possible. The revisions * Agree that these are to be shown as a separate line are scheduledto be completedby 1991, at whichtime a item newversion would be issued. * Decidewhere the adjustmentsare to be made and Giventhe shortcomingsof the current systemwith re- wherethe adjustedaggregates are to be shown(in satellite spect to the environmentand natural resources,the question is how to reach the long-termgoal of making the accountsor i the main systemof producton, consump- necessarychanges so that national income accounting tion, and accumulationaccounts). more accurately represents true, sustainable income. On the issueof resourcedepletion and degradation,the Some,at leastin the past, have arguedfor radicalchanges, Bank recommendedthat the expert group: whileothers have supported more gradual changesthat * Adopt the principleof sNA-linkedsatellite accounts, wouldimprove income estimatesby movingthem in the where adjustmentsfor resource depletion and degrada- right direction. Although it is clearly desirable to make tion can be made improvementsas soon as possible,some outstandingc on- o Advisecountries where a significantportion of gross ceptualissues are yet to be resolved,and much empirical workmuststilbedonebefre secifc rcommndatons nationalproduct (GNP) is based on the depletionor degra- work muststill be done beforespecific recommendations dation of naturalresources that current income,as calcu- for changesin the core of the SNA can be made. In the lated at present,overestimates sustainable income and that meantime,the creation of satelliteaccounts appears to policymakersshould explicitly be alerted to this fact be the only realisticoption for progressin this area. * Encouragework on estimatingthe costs and benefits of resourcedepletion and degradation. sNA Expert GroupMeeting (Vienna, March 1988) The membersof the group agreedthat these two issues In the contextof deliberationsover whether and in what are of great importance and indicatedthat they shared waythe SNA shouldbe revised,the WorldBank presented the Bank'sconcern about the environmentand supported a discussionnote to the SNA expert group meetingheld the constructionof satelliteaccounts linked withthe SNA, in March 1988 in Viennaunder the agendaitem "Links as well as the developmentwithin the central SNA frame- between SNA and EnvironmentStatistics." The note fo- work of the functionalclassification of governmentexpen- cusedon the two main concernselaborated in Chapter 1: ditures (COFOG) and enterpriseexpenditures (coip) in order to identifyexpenditures relevant to environmental analysis.However, they did not agree to changingthe ______core accounts of the SNA in any fundamental way. Three Note:The annexwas written by Jan W.van Tongeren. reasons weregiven for this.

88 RecentDevelopments and Future Work 89

* Since there are variousconceptual approaches that * As presentlycalculated, GDP is not a comprehensive could be taken for revisingthe SNA, a consensusshould indicatorthat can satisfyadequately a diversityof needs, be reachedbefore the core SNA is revised. and its shortcomingsshould be kept firmlyin mind. * In the environmentalfield many valuationissues are * ReplacingGDP with a more sustainablemeasure of difficult,and more work is required beforestandard val- incomeis not yet feasible.For the time being, therefore, uationtechniques can be applied. satelliteaccounts linked to the SNA should be created in * The group waspleased that a list of paperspresented which adjustmentsand alternativecomputations can be at the joint uNEPIWorldBank workshopswas attachedto made. the Bank's position paper. But since they had not seen * The revisedversion of the "blue book" (the volume them beforebecause of the limitedcommunication so far describingthe core accountsof the SNA), to be issued in betweenenvironmentalists and nationalaccountants, they 1991, should have a section in which satellite accounts did not knowwhat the issuesand options were (and this for the environmentare outlined. supported the urgent need for producingthis volume). * For the environment,net measures,such as net domes- (NDP), and shouldbe As a concessionto the environmentalcommunity, the emhszdortangsseaumns,ucasGPtic product maybe more meaningful chairmanstte ~tha if an.hnaeuaeeprec emphasizedmore than gross measurements,such as GDP. chaian stated withsatei anda when t rienc * Further developmentsof the draft frameworkmight hasceenl gainedwithlsateite accountshand wen variousdt deal withvarious assets such as air, water,and land sep- nationalaccountants should be open to an re revision, arately,since a uniformtreatment may not be possible. enationthaccountan shoulner on to antSNa .reion, * A classificationof intermediateconsumption by func- eveneinthat wast mu the twenty-yearipei.o tion (coIP) and government expenditure by function Duringbetwengthethe lasond discussion the some urre otherreinso points werew made by ansevc"aridtfe.(COFOG)should be developed where "environmental goods variousvaiuparticipants.pripat. ande services"Accounting arefor identified. stocks of naturalresources should be * Usersshould be cautionedabout the gross,domestic done in physicalterms, not in monetaryterms; monetary product (GDP) as calculatedat present; the revisedSNA estimations,however, should be attemptedfor changesin manual ("bluebook") should includea discussionof the the stock of resourceswithin the period under consider- shortcomingsof the GDP and state necessary warnings ation. againstits indiscriminateuse. * For exploitable,commercially salable resources such - Communicationbetween national accountants and as minerals,a user cost approach,such as the one pro- environmentaleconomists should be encouragedso that posed by El Serafy,should be followed(Chapter 3). problemscan be discussedjointly. * For "permanent"resources, such as air, water, and * Approximationsthat may be needed in erivironmen- soil, two options should continueto be pursued simulta- tal accountingmay not be worse than some currentarbi- neously:treating restorationcosts as intermediateexpen- trary estimationsalready sanctioned by the SNA,. ditures rather than as final ones, as is generallydone in * The SNA shouldbe linkednot only withenvironmen- the SNA, and treating damagesto "permanent"resources tal statisticsbut with socialstatistics as well. as consumptionof natural capital. At the end of the meetingthe group agreed that these * Two (or possiblythree) NDPsshould be computed: issueswould have to be discussedagain and that prefer- GDP - consumptionldepreciationof man-madecapital ablynational accountants and resourceeconom,ists should = NDP1 address them together. A meeting combiningthe two NDPI - consumption/depreciationof natural capital groups was held in November 1988, as described below. = NDP2. * Further research is necessaryto decide what deduc- Joint Unmentald Ac nk nting th S tions for defensiveexpenditure would be appropriateto EnvironmentalAccounting and 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 environmentalsatellite accounts (Bartel- mus and van Tongeren 1988). Both groups were willing to learn, the meetingwas very productive,and a consen- This was the last expert meetingof many held during sus wasreached on 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 issues had to be decided. On the they should be properlyaccounted for. issue of the environment,the meetingendorsed the crea- 90 Ernst Lutz and Salah El Serafy

tion of environmentalsatellite accounts linked with the counting"needs to be developedinto a draft manualand SNA. It wasdecided that the new"blue book"will describe eventuallyinto 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 Evaluationof existingschemes. Currently, several in- incomeis concerned,the meetingadopted the Hicksian dustrial countries (Canada,France, Federal Republicof definition(See Daly,Chapter 2 and El Serafy,Chapter 3), Germany,Japan, Netherlands,Norway, and the United witha minoraddition, as a basis for definingthe coverage States) have developedor are developingresource ac- and treatmentof capitalflows. Accordingly, income is the counting systems.Each of those approaches should be maximuman individual(or nation)can consumeduring a evaluatedand any general 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 projects would: try out the Bartelmus-vanTongeren capital during the period. The explicit adoption of this frameworkin severalcountries with differentnatural and concept does not imply,however, that the central SNA environmentalresource problems and perhaps in one or frameworkhas fully adopted the concept of sustainable two industrial countries with the most availabledata, income. providelessons for integrationinto the draft manual,and As a matter of fact: determinethe policyimplications of the improvedincome * GDP will continue to be defined under the revised accounting. sNA without ajtefWorking group and expert meetings.The authors of SNA without adjustmentfor the degradation of natural tedatmna n h esn novdi h io capitalfrom the process of productionand consumption. * The use of nonrenewablesubsoil assets will not be sutuinevsioouldmstudies should meet to sevuentlereviewthe draft presenTedmanual. Thetoa re- taken defningnto acountin alue dded.sulting revision would subsequently be presented to an taken intoccoutinefinngvaueadedexpertmeeting and afterwardbe developedinto a hand- An alternative sustainable income concept to GDP book. thereforewill have to be elaboratedin a separate hand- * In-depthcase studieson developingcountries. Con- book on environmentalaccounting. 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- * Physicalresource accounting. UNEP has alreadydone ment;it is reproducedas the annex to this chapter.The considerablework in this area,but further effortis needed proposalis very important from an environmentalpoint to assess the environmentand 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 well as other possible Inducingproduction and consumptionpractices with ones, would be undertaken cooperativelyby the World less negativeeffects on the environmentworldwide is a Bank, the U.N.Statistical Office (UNSO), the U.N.Devel- formidabletask. Changes are 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), bilateral donors, nongovernmentalor- are often slow in coming.Improvements in any one area ganizations,and developing-countrygovernments. can make only a partial contribution to an approach where manyparallel activitiesare 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. Environmentalaccounting is only one of many Standards" for Reconciliation Accounts tools that are needed, and, giventhe lack of past effort, it willtake time to develop it into an effectivetocl to M.60is an importantdocument from the point of view improvepolicymaking. Nevertheless, serious work in this of environmentalanalysis because it includesa framework area should now be pursued activelyand vigorously. and supplementaryguidelines for developingresource After several years with little visible progress, some balances(stocks and flows)that are compatiblewith the steps forward have been made recently in the fieldsteps offah bn dSNA.blne Since sok M.60 was n developedlw)ta much r optbewt later than the SNA,h environmentaland resourceaccounting. But much niore however,it reflectssome advancesin the field that were remainsto be done both at the conceptualas wellas the not availablewhen the 1968 SNA was drafted. Therefore practicallevels. there are severalincompatibilities between the SNA and * Draft manual/handbook. The Bartelmus-vanTon- M.60 that should be addressed during the present SNA geren "Draft Frameworkfor EnvironmentalSatellite Ac- revision. RecentDevelopments and Future Work 91

The general rule in the SNA and M.60 is that changes * Nonreproducibleassets should be included in the in nonreproducibleassets are recordedin the capital(flow) balancesheets when they are marketed and their use in accountswhen a transaction(a purchaseor sale) occurs human production activitiesgenerates product and in- and in the present M.60 reconciliationaccotnts when come. This impliesthat land should be includedwhen it other changesoccur in the asset balances.In additionto is used for agriculture,human settlement, and so forth price changes,the latter includechanges from 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 value of nonreproducibleassets in the balance putedproduction, including own-account agricultural out- sheet and reconciliationaccounts when there is,no sale is put and imputed dwellingsservices to owners. For the based on actualvalues of similarassets that are sold(such samereason, historicalmonuments should be includedin as for land) or on the sum of discountedfuture values the balance sheets as soon as the assets generate identi- (suchas for timber tracts and mineraldeposits'. fiable income.In other words, assets should not be in- The generalrules are not applieduniformly to all assets cludedwhen they are marketedbut whenthey are actually and are unclear for some. The actual treatment distin- used for production and other activitiesthat produce guishes amongland; historicalmonuments; tirnber tracts flowsregistered elsewhere in the SNA. It is important to 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 livestockfor meat production. other, to arriveat correct capital-outputratios and other measuresof productivity. SpecificApplications of the GeneralRule * The natural growth of agricultural products, products of plantationsand orchards, timber, and livestock * Natural resourcesin the public domain are entirely for dairy, breeding,and meat production should be re- excluded. corded as gross output at the momentof growthand not * Land and historicalmonuments are 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 reccrded in (for livestock).During growth,the production shouldbe the M.60reconciliation accounts if sales take place. reflected in changes in stocks, and, once allocated to * For mineralresources, new finds as well as depletion uses, the stocks shouldbe reduced again. This treatment are recordedin the present M.60 reconciliationaccounts. wouldeliminate from the present M.60 reconciliationac- It is not clear, however,what the exact coverageof the countsthe entriesfor naturalgrowth minus depletionand newfinds is; does it includeall newfinds, does it include wouldchannel these entriesthrough all changesin stocks, only those mineraldeposits that are actuallymined, or is except for livestockgrowth used for dairy,breeding, and there some intermediatetype of coveragefor newfinds? similarpurposes, which would be 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 agriculturalproducts suggested ation accounts.There is no link between thi.streatment by the November1988 meeting in Buenos Aires organ- in the balance sheets and production,which is recorded izedjointly by the EconomicCommission for Latin Amer- only when timber is logged and when orchard and plan- ica (ECLAC/CEPAL) and the Monetary Center for Latin tation productionis harvested. America(MCLA/CEMLA). That suggestionwas made to bet- * The growthof livestockis included,on the one hand, ter link gross output and cost in agriculturalproduction, as an item in the M.60reconciliation accounts i(together particularlyunder high inflation.Similar arguments would with the other natural growthitems mentionabove) and, hold for all the other products of natural growth men- on the other hand, as either grossfixed capital formation tioned above. (for animalsfor dairy,breeding, draft, and so forth) or changesin stocks(for animals for meat production).These References two treatmentsseem contradictory. * Agriculturalproduction is not reflected in the bal- Bartelmus,Peter, and Jan W. van Tongeren.1988. "Draft ance sheets or reconciliation accounts and is not regis- Frameworkfor EnvironmentalSatellite Accounting."U.N. tered as changesin stocks during the growthprocess. It StatisticalOffice, New York. Processed. is recorded as man-made production after it is harvested. UnitedNations. 1968. "A Systemof NationalAccounts." Publi- cationE.69.XVI1.3. New York. ProposedModifications The following modifications would make the above treatmentsmore consistent.

Appendix Participantsat the tNEP-World Ban Workshops

The affiliationsgiven were those at the time the work- Second Workshop, Washington, D.C., shops wereheld. November 5-7, 1984

Chairman:Yusuf J. Ahmad,UNEP, Nairobi,Kenya First Workshop,Geneva, February 23-25, 1983 Rapporteurs:John Dixon, East-WestCenter, University of Hawaii,Honolulu, U.S.A.; and RichardB. Norgaard, Chairman:Yusuf J. Ahmad,UNEP, Nairobi,Kenya JUniversityof California, Berkeley, U.S.A.

Contributors Contributors

Anthony Friend, Statistics Canada, Ottawa, Canada. Robert Goodlandand GeorgeLedec, World Bank, Wash- "Natural Resource Accounting:International Experi- ington,D.C., U.S.A. "Neoclassical Economics and Prin- ence." ciplesof SustainableDevelopment." Per Garnasjordet,Central Bureau of Statistics,Dslo, Nor- Roefie Hueting,Central Bureau of Statistics, Voorburg, way."Resource Accounts: The NorwegianExperience." Netherlands."Economic Aspects of EnvironmentalAc- Roefie Hueting,Central Bureau of Statistics,Voorburg, counting." Netherlands."Use of EnvironmentalData in Economic RichardB. Norgaardand John Dixon,University of Cali- Decisions:Netherlands." fomia, Berkeley,and Universityof Hawaii, Honolulu HenryM. Peskin, Resourcesfor the Future, Washington, (respectively),U.S.A. "Project Design and Evaluation D.C., U.S.A."National Income Accounts and the Envi- UsingEconomic and CoevolutionaryCriteria." ronment." Jacques Theys, Ministry of the Environment, Paris, MichelPoitier, EnvironmentDirectorate, OECD, Paris, France. "EnvironmentalAccounting and Its Use in De- France. "NationalResource Accounts: OECD." velopmentPolicy." Walter Spofford,Resources for the Future, Washington, D.C.,U.S.A. "Environment and Development." OtherParticipants Jacques Theys,Ministry of Environment,Paris, France. "NaturalResource Accounts: France." Ali Al-Damkhi,Environment Protection Council,Safat, AtsushiYoshikawa, Environment Agency, Tokyo, Japan. Kuwait "MacroeconomicAccounting for the Environmentand Ali Al-Juwaiser,Saudi Fund for Development,Riyadh, the Qualityof Life." SaudiArabia Lester Brown, WorldwatchInstitute, Washington,D.C., Other Participants U.S.A. DavidBurns, International Institute for Environmentand Partha Dasgupta,London School of Economics,United Development,London, United Kingdom Kingdom HermanE. Daly,Louisiana State University,Baton Rouge, Robert Goodland,World Bank, WashingtonD.C., U.S.A. U.S.A.

93 94 Participantsof the UNEP-World Bank Workshops

RemediosDe Leon,National Economic and Development "EnvironmentalAccounts and DevelopmentPlanning: Authority,Manila, Philippines Proposalsfor a Programmeof Action." Robert Goodland,World Bank, 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,Ministry of Lands, Dar es Salaam, Nigeria Tanzania Serge Antoine,Ministry of the Environment,Neuilly sur- Charles M. Kasaba, National Environmentand Human Sene Frnc SettlementSecretariat, Nairobi, Kenya Seme, France ArabindaKundu, World Bank, Washington,D.C., U.S.A. Iwan JayaAzis, Universityof Indonesia,Jakarta JamesLee, WolakahnDavid Burns, Institute for Environmentand Development, James Lee, WorldBank, Washington,D.C., U.S.A. London,England RagnarOverby, World Bank, Washington,D.C., U.S.A. AlisonA. Gilbert, Free University,Amsterdam, Nether- A. Padmanabhan,Commissioner for RevenueAdministra- lands tion, Madras,India RoefieHueting, Central Bureau of Statistics, Voorburg, DavidPearce, University College, London, United Kingdom Netherlands WilbernePersaud, Universityof the West Indies, K;ings- G. L. Kamukala, Ministry of Lands, Dar es Salaam, ton, Jamaica Tanzania HenryM. Peskin, Resourcesfor the Future, Washington, Charles Karaba, NationalEnvironment and 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, Resources for the Future, Washington, U.S.A. D.C.,U.S.A. ArmandoLosada, Colombia. Pedro Vivas,National Planning Institute, Lima, Penr Kosit Panpiemras,Office of the NationalEconomic and JeremyWarford, World Bank, 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:Yusuf J. Ahmad,UNEP, Nairobi,Kenya, and Robert Repetto, WorldResources Institute, Washington, Robert Goodland, World Bank, Washington, D).C., D.C.,U.S.A. U.S.A. Juan Pablo Ruiz, EnvironmentOffice, Bogota, Colombia Rapporteur:Salah El Serafy,World Bank, Washington, Harlen dos Santos,Ministry of UrbanDevelopment, Bras- D.C.,U.S.A. ilia, Brazil SophieSchlingemann, UNEP, Nairobi,Kenya Contributors Fourth Workshop,Washington, D.C., HermanE. Daly,Louisiana State University,Baton Rouge, November 17-18, 1986 U.S.A."A ModestProposal for a ModestStart in Mod- estly RelatingEnvironmental and EconomicAccounts." Chairman:Salah El Serafy, World Bank, Washington, John Dixon(with Richard Carpenter, Louise Fallon, Paul D.C.,U.S.A. Sherman,and SupachitManopimoke), East-West Cen- Rapporteur:Derek W.Blades, OECD, Paris, France ter, Universityof Hawaii,U.S.A.. "EconomicMeasure- Contributors ment of EnvironmentalEffects." Huib Jansen and J. B. Vos,Free University,Amstercdam, Peter Bartelmus,UNSO, NewYork, U.S.A.. "Environmen- Netherlands."Indicators for EnvironmentalProblems tal Accountingand the SNA." in DevelopingCountries." Derek W. Blades, OECD, Paris, France. "Environmental Richard B. Norgaard,University of California,Berkeley, Statisticsand the NationalAccounts." U.S.A. "LinkingEnvironmental and National Income HermanE. Daly,Louisiana State University,Baton Rouge, Accounts." La., U.S.A. "Towarda Measureof SustainableSocial JacquesTheys, Ministry of the Environment,Paris France. Net NationalProduct." Participantsof the UNEP-World Bank Workshops 95

Salah El Serafy,World Bank, Washington,D.C., U.S.A. J. L. Weber,Ministry of Research,Neuilly, France. "Les "The Proper Calculationof Income from Depletable Comptesdu PatrimoineNaturel (PresentationSuccinte NaturalResources." d'ExperienceFrancaise." Anthony Friend, Statistics Canada, Ottawa, Canada. "Natural Resource Accounting: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,Including Natural Resources, in Spain the NationalIncome." G. Guignabel,Ministry of Environment,Paris, France ChristianLeipert, International Institute for Environment Other Participants and Society,Berlin, Federal Republicof Germany 0. Lone,Ministry of Environment,Oslo, Norway YusufJ. Ahmad,UNEP, Nairobi,Kenya Lorents Lorentsen,Ministry of Environment,Oslo, Nor- Robert Goodland,World Bank, Washington,D.C., U.S.A. way Anne Harrison,World Bank, Washington,D.C., U.S.A. J. Margat, Research Institute for Geology and Mines, RagnarOverby, World Bank, Washington,D.C., U.S.A. France HenryM. Peskin,Resources for the Future, Wlashington, N. Mensah,UNEP, Nairobi,Kenya D.C.,U.S.A. G. Panella,Ministry of Environment,Rome, Italy Robert Repetto, WorldResources Institute, WAashington, Sophie Schlingemann,UNEP, Nairobi,Kenya D.C.,U.S.A. 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:Derek W.Blades, OECD, Paris, France Chairmen:Jacques Theys, Ministry of Environrnent,Paris; and YusufJ. Ahmad,UNEP, Nairobi,Kenya Participants Rapporteur:Per Garnasjordet,Central Bureau of Statis- tics, Oslo,Norway YusufJ. Ahmad,UNEP, Nairobi,Kenya Peter Bartelmus,uNso, NewYork, U.S.A. Contributors RameshChander, World Bank, Washington,D.C., U.S.A. AnthonyFriend, Statistics Canada, Ottawa, Canada A. Gilbertand W.Hufkamp, Free University,Amsterdam, Anne Hrisn, Stat, Ckbrdgt, U.K. Netherlands."Natural Resource Accounting in a Multi- Anne Harrison,consultant Stockbridge,U.K. ObjectiveContext." Peter Hill,OECD, Paris, France DavidJames, Institute for EnvironmentalStudies, 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 Constructionof Lorents Lorentsen, Central Bureau of Statistics, Oslo, an EnvironmentalIndicator in MonetaryTerms as a Norway Supplementto NationalIncome with the Aid of Basic Ernst Lutz, WorldBank, Washington,D.C., U.S.A. EnvironmentalStatistics." Pablo Mandler,Central Bureau of Statistics,Jerusalem, H. Jansenand B. Vos,Free University,Amsterdam, Neth- Israel erlands."Indicators for Assessmentsof SustainableDe- AnilMarkandya, University College, London, U.K. velopment." Brian Newson,Statistical Office of the European Com- T. Loikkanen,Ministry of the Environmenil,Helsinki, Fin- munities,Luxemburg land. "EnvironmentalAccounting Developmrents in Fin- GrahamPyatt, Universityof Warwick,Warwick, U.K. land." SelangeSenaize, UNEP, Nairobi,Kenya I. M. Naredo,Madrid, Spain. "Caracteristiquesdes Ap- Carsten Stahmer, Federal StatisticalOffice, Wiesbaden, proches EconomiquesNecessaire pour Tenir Compte Federal Republicof Germany des ResourcesNaturelles (Comparison avec le Systeme JacquesTheys, 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 Cost(s):best estimatesof, 29; of defensiveexpenditures, 33-38; experiments to measure environmental,37; of extraction,17; need for Balancesheet accounts,40, 42, 44; guidelinesin S9A for, 81-82; for estimatesof environmentaland nonmarket,60; of pollutionabate- natural resources,24 ment,27-29, 31; shadow,60, 64 n3 Bartelmus,Peter, 6, 85, 86 nnl, 2, 89 CMted'lvoire: establishment of soilaccount in, 50 Baumol,William J., 62 Cremeans,J. E., 28-29 Bax,J., 37 Benerit-costanalysis, 56; as method to achievemonetsry value, 62-63 Daly,Herman E., 2, 3, 6, 20, 84, 85, 90 Blades,Derek, 2, 59 Data,environmental: international organizations as coordinatorsof, 54- Bounded-knowledgesynthesis, 56-57 55; as link to economicinformation, 65; as sources for developing Bower,Blair T., 77 nl countriesof, 47-49; as sourcesfor pollutionabatement, monitoring, Bye,Torstein, 5 and controlcosts, 28-29. See alsoStatistics, environmental Data Resources,Inc., 72 Canada:input-output model use in, 26; resourceaccc,unting in, 5 Defensiveexpenditures.- categories of, 9; for environmentalprotection, Capital:aggregation of physicaldata for environmental,63; benefitsand 20-22, 33-38; existingand proposedaccounting treatment for, 1-3. disbenefitsassociated with environmental,66, 67; consumptionof See also Costs;Pollution abatement; Sustainability fLxed,20; consumptionof natural,6; countryapproaches to assessing de Groot,R. S., 37 natural resource,4547; depletionfactor as invesimentand, 13-14, de Jouvenel,Bertrand, 42 17; deteriorationof environmental,60; distinctionbetween income Denison,Edward F., 72 and, 11, 17; environmentalenhancement as format:ionof, 22-23, 33; Depletion:accounting in industrializedcountries for, 10; factor as cap- environmentas formof social,66; gain and loss,68-69; in national ital investment,13-14, 17; failureto assess natural resource and accounts,79; physicaldepredation of, 68; quantifyingenvironmental environmentalcapital and, 60; of renewableand nonrenewablenatu- stocksof, 44; relationto income(Fisher) of, 66; seirviceflows created ral resources,3, 9. See also Capital;User cost approach by environmental,63, 66; substitutabilityof, 62; use of salesof, 13. Depreciation:accounting for, 3-4, 12-13; additionsin national ac- See also Capital,man-made; Depletion; Depreciation countsto ordinary,73; of capital,68; conceptin nonmarketaccount- Capital,man-made: accounting treatment by SNAfor, 3; consumptionof, ing for, 61; of nonrenewableresource, 37 6, 20-22; depletion of, 9; expendituresfor, 20; measurementof Deterioration,physical: as distinctfrom economic depreciation, 60 consumptionof, 22 Developingcountries: environmental accounting for, 45-48; environ- Centralaccount (stock account). See Environmentalaccounting; Natural mentalinformation in, 4749; national accountingmethods in, 10; resourceaccounting nonremunerativesector of, 47; problemsof implementingenviron- cEs (Conferenceof EuropeanStatisticians), 54, 80 mentalaccounting in, 47-50, 60-63; proposalsto implementenvi- Christiansen,Gregory, 78 n12 ronmentalaccounting in, 49-52, 63-64; resourceaccounting for, 6; Churchman,C. West,57-58 n5 SNAaccounting treatment of natural resource revenue, 10; use of Classificationof outlaysof industriesby purpose(coIIw), 83 economicdepreciation in nonmarketaccounting in, 61; valuation Classificationof the functionsof government(coFo(,), United Nations: methodsin, 63 data on pollutionmonitoring and abatement,28 Disasterexpenditure: accounting treatment for, 23 cowp(Classification of outdaysof industriesby purpose),83 Disbenefits:valuation of, 66, 67 Conferenceof EuropeanStatisticians (CEs), 54, 80 Discountrate, 14, 16. See alsoInterest rates Consumption:of environmentalcapital services, 63; of fixed,man-made, Donovan,D. G., 37

97 98 Index

Dravie,Christophe A., 50 IARIW-ECA (International Association for Research on Income and Dutch Disease,10-11, 17 nl Wealth-EconomicCommission for Africa),48 ICORS(incremental capital-output ratios), 12 Economicand SocialCommission for Asia and the Pacific(ESCAP), 48 Income:from capital, 66; creatingpermanent stream of, 13-14; defini- EconomicCouncil of Japan, 37 tion for sustainable,24; from depletablemineral resources, 12-13; Economicdevelopment: preference for sustainable,55-56; standards distinctionbetween capital and, 11, 17; Hicks'sconcept of, 2, 8, 9, for sustainable,35-37 11, 24, 90; Marshall'sdefinition of, 67-68; sustainabilityof, 8; true, 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:benefits and disbenefitsof servicesgenerated by assets Income,national. See Gross domesticproduct (GDP); Nationalincome of, 66-67; conceptualand measurementproblems for darmageto, 80; (NI) effectof changes in qualityof, 72; estimateof effectsof policieson, Incomeaccounting, 1 40; as form of capital, 23, 66; functionsof, 38 nl; methods to Incrementalcapital-output ratios (ICORS), 12 measurecomponents of, 65; programsto reversedegradation of, 22; Industrialaccounts, 73 standardsetting for functionsof, 35-36; statistics,19, 80 Industrializedcountries: planned environmental accounting in, 45 Environmentalaccounting: actions to start implementationof, 51-52; Information,environmental: bounded-knowledge synthesis as conceptto countryplans for, 5, 37, 45; for developingcountries, 45-48; devel- combine,56-57; in developingcountries, 47-49; and preference,34; opmentof internationalstructure for, 52; in France,40-53; and link for socialdecisionmaking, 55; systemin Francefor, 40-42. See also to SNA, 80; physicalunits in, 55; problemsin countryimplementation Preferences;Valuation of, 47-50, 60-63; proposalsfor developingcountries to implement, Input-outputanalysis: environmental services and damage as, 84; MEB 49-52; use for policymakingof, 49. See also Patrimonyaccounting; as extensionof, 81; pollutionassessment using, 26-28 Naturalresource accounting Institut Nationalde la Statistiqueet des Etudes gconomiques(INSEE), Environmentalcapital. See Capital 81, 83 Environmentaldamage: accounting in modifiednational accountsfor, Interestrates: as expressionof value,55-56 73-76; correct value of actual, 84; disasterexpenditure accounting International Associationfor Research on Income and Wealth-Eco- for, 23 nomicCommission for Africa(IARnW-ECA), 48 Environmentalprotection. See Defensiveexpenditures InternationalUnion for Conservationof Nature and NaturalResources Environmentalquality: measurement in theoretical,modified, and con- (IucN), 79 ventionalnational accounts, 76 Investment:use of grossand net conceptsin accountingfor, 67-68. See Environmentalstock. See Capital also Capital ESCAP (Economicand SocialCommission for Asiaand the Pacific),48 IUCN (InternationalUnion for Conservationof Natureand Natural Re- Ewers,H. J., 38 n3 sources),79 Extraction,mineral: assessment of rates of, 4, 16; depletionaccounting for, 12-14, 16 Japan:resource accounting in, 5 Jazsi,George, 29 FDES (Frameworkfor the Developmentof EnvironmentStatistics), 19, Johnson, HarryG., 66 80 Feyerabend,Paul, 57-58 n5 Kapp,K. W.,34, 38 n3, 54 Fisher,Irving, 66 Keynes,John M., 7 nl, 17 n2 Frameworkfor EnvironmentalSatellite Accounting:proposed hand- Kneese,A. V.,26, 31, 38 n3, 65, 77 nl book for, 90 Kuznets,Simon, 32, 33, 34 Frameworkfor the Developmentof EnvironmentStatistics (IDES), 19, 80 Landefeld,J. S., 60 France: environmentalsatellite accounting, 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): classes of expendituresusecl for, 33; Lorentsen,Lorents, 5 conceptsfor environmentalprotection and use of, 84-85; correction for environmentalmeasurement of, 32-34; definitionand shortcom- M.60standards, 90 ings of, 1-2; macroeconomicanalysis and, 13, 23; willingness-to-pay Macroeconomicanalysis: use of gross and net productin, 13 method to correct, 34-35. See also Nationalaccounts; National in- Magrath,William, 6 come(NO) Marglin,Stephen A., 64 n6 Gross national product(GNP), 1, 8; effectof environmentalfactors on, Marketmechanism: natural resourcecapital and, 61 71-72; theoretical modificationsto, 75-76; in U.S. national ac- Marshall,Alfred, 12, 67-68 counts,70, 71 Materials-energybalance (MEB): compatibilitywith SNA, 80-81 Measurement:correction of GDP,32-34; experimentsfor environmental Handbook:proposed for integrationof input-outputstatistics, 81; pro- cost, 37; of market valueof abatement,30-31; of preference,34-35 posed for satelliteaccounting, 90 MEB. See Materials-energybalance Harrison,Anne, 2, 3, 6 Mirrlees,James A., 60, 64 n3 Hicks,John, 2, 8, 9, 11-13, 17 n2, 24, 79. See alsoIncome Mishan,E. J., 34 Hines,J. M.,60 Monetaryaccounting: in France,40 Hirsch,Fred, 77 n9 Myrdal,Gunnar, 49 Hotelling,Harold, 12, 18 n4 HotellingRule, 16 Nationalaccounting concepts, 70 Hueting,Roefie, 3, 34, 37, 38 nl, 83 Nationalaccounts: correction for defensiveexpenditures in, 32-34, 37- HufschmidtM., 57 nl 38; input-outputsystems and, 81; measuringpollution in, 26-31; Inidex 99

modificationof structurefor, 69-76; naturalproduction account for, Repetto,Robert, 6, 63, 78 nI3, 81, 84 84; problemsand proposalsfor expanding,63-64; proposed treat- Resourceaccounting: development of, 4-5, 6;for flowsof materialsand ment of depletionand extractionin, 12-16; role of householdpro- naturalresources, 80-81. See also Environmentalaccounting; Natu- ductivityin, 71; theoryto linkeconomic and environmentaldata in, ral resourceaccounting; Patrimony accounting 65; in UnitedStates, 70 Resourcestocks, 44 National income and product account: comparisonof modifiedand Ricardo,David: and conceptof rent, 18 n5 conventional,73-76; of theoreticaleconomy, 70-73, 76 Robertson,Dennis, 18 n7 Nationalincome (NI): in U.S.national accounts, 16, 70-72 Ross,M. S., 37 Naturalcapital. See Capital Ruggles,Nancy, 77 n7 Naturalproduction account: as proposalfor nationalaccounts, 84 Ruggles,Richard, 77 n7 Natural resourceaccounting: development of central account for, 42, Samuelson,Paul, 79 44, 51; treatmentof capitalby SNA in, 3 Satelson, al,79 Naturalresource economies. See Developingcountries Satelliteaccounts: alternative statistical systems as, 19, 24; in France, Natural resources:as assets with permanent incomest-eam, 13-14; 40; informationon physicalunits in, 33; proposedenvironmental, 82, effectof treatmentas capitalassets of, 21; exploitableand perma- 89. Seeaso Frameworkfor EnvironmentalSatellite Accounting nent, 20-22; in French patrimonialaccounting, 44; importancein Saunders,C. T., 27 developingcountries of, 13, 46-47; measurementof capitalconsump- Schulz,Werner, 38 n3 tionof, 22-23; separationof capitaland incomefor depletable,17 Seneca,J.d1., 30 NaturalSee resourceCapital stock. environmental: benefits and disbenefits of, 66-67 Naturalresource stock. SeeCapital ~~Services,Smith,Adam: distinction between capital and incomeof, 11

Net domesticproduct (NDP):new conceptsfor environmentalprotection SNA.See Systemof NationalAccounts, United Nations and, 84-85 and, 84-85 ~~~~~~~~~~~~~~SocialSocialrestorationcost. See Capital; cost, 83Costs; Disbenefits; Pollution Net environmentalbenefit: in modifiedconventional natiDnal account, Solow,Robert, 12, 18 n4 73 SPIREmodel, 1 Netherlands:proposal for sustainableeconomic development in, 37 SPIREmodel, 40-41 Net nationalproduct (NNP): as sustainablesocial net national product SSDS(System of Socialand DemographicStatistics), 80 (ssNNP), 8; in U.S.national accounts, 70, 71 Statistics,environmental: methods to improve,19; physicalstatistics Net product:in macroeconomicanalysis, 13, 23 developmentfor, 80 NI. See Nationalincome StatistiskSentralbyra, 81 NNP. See Net nationalproduct StimulationProgramme for Researchin HumidTropical Forest Lands Nonmarketaccounting, 1, 55-56, 59-61 (Tropenbos),37 Nordhaus,William, 79 Substitutability,62 Norgaard,Richard B., 5, 6 Sustainability:of consumption,11, 35; of development,33, 37-38, 55- Norway:resource accounting 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 (Organisationfor EconomicCo-operation and Development),28 Sustainablesocial net nationalproduct (SsNNP), 8 Olson,Mancur, 76 Systemof NationalAccounts (SNA), United Nations, 1-2; balancesheets Organisationfor EconomicCo-operation and Development(OECD), 28 and reconciliationaccounts in, 81-82; developmentof, 55; environment aspects coveredby, 81-84: Frameworkfor EnvironmentalSat- PACE (pollutionabatement and controlexpenditures), 28-29 elliteAccounting and, 86; functionalclassifications for, 83; inadequa- Page, Talbot,61 cies and proposedrevisions of, 19, 24-25, 88-89, 90; omissionof Patrimony:description of natural,42-43 environmentalaccounting in, 5; proposalto combineeconomic and Patrimonyaccounting: as French approachto resourceaccounting, 5 environmentalinformation in, 80; treatmentof man-madeand natural 40-53; as part of environmentalinformation system, 40 resourcesby, 3, 10 Pearce,D. W.,28, 31 Systemof Socialand DemographicStatistics (SSDS), 80 Peskin,Henry M., 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 Natural resources; Natural re- Tinbergen,Jan, 34 sourceaccounting Tobin,James, 79 Physicaldepreciation, 68 POLLEN model,40-41 Ulrich,Werner, 57-58 n5 Pollution:baseline for measurementof, 28; benefitsof abatementof, 2, UNEP (UnitedNations Environment Programme), 49, 80 28-31, 66; disbenefitsassociated with, 66-67; measurementof, 2-3, UnitedKingdom Atomic Energy Authority, 27 26-31; output,effects, and costs of, 26-31 UnitedNations, 19, 48, 79, 80, 81, 82, 83, 88 Pollutionabatement and controlexpenditures (PACE), 28-29 UnitedNations Environment Programme (UNEP), 49, 80 Popper, Karl,57-58 n5 UnitedNations Statistical Commission, 80-81 Preferences:for sustainableeconomic development. 35, 37-38, 55-56; UnitedNations Statistical Office (uNso), 80 use of surveysto determine,34-35 UnitedStates: national accounts in, 70; proposedadditions to national Preventiveexpenditure. See Defensiveexpenditures accountsof, 73-77; resourceaccounting in, 5; valuationof environ- Price: determinationof natural resource,12; shadow, 32, 35, 60, 64 n3 mentalfunctions in, 63 U.S.Department of Commerce,77 n7; Bureau of EconomicAnalysis Quasi-rent,12 data for pollutioncosts of, 28, 29, 73 UNSO (UnitedNations Statistical Office), 80 Rehabilitationexpenditure: accounting treatment for, 22-23 User cost approach,3-4, 7 nl, 14, 16, 17; in irreplaceablenatural Rent,4, 10, 12 resource,12. See also Depletionfactor; 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 WORLD BANK

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`orld Bank.

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 MVanagementfor 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