National Environmental Accounting

Bridging the Gap between Ecology and Economy

Joy Hecht, Joy E Hecht

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9781891853944
• eBook ISBN: 9781136525636
• Topic: Law
• Subtopic: Environmental Law
• Index: Law

This book presents national environmental, or 'green' accounting as it has developed in Europe and other parts of the world. It introduces the most recent methods developed through the United Nations Statistical Department and other international organizations, but bridges the gap between the superficial treatment of environmental accounting in economics textbooks and environmental literature, on the one hand, and the highly technical manuals of international organizations, on the other.

Joy Hecht begins with a history and introduction to national income accounting. The first part of her book explains how the environmental accounts build on the structure of the 1993 System of National Accounts. She then shows the UN approach to accounting applied to pollution, recycling, and the management of natural resources such as forests, minerals, and fisheries. The third section discusses how the accounts approach green GDP and other macroeconomic indicators. The book concludes by going beyond the UN structures to discuss other adjusted macroeconomic measures and how accounting data can be used to build them.

National Environmental Accounting is a non-technical introduction to an increasingly important field. It is a must-read for anyone interested in how environmental accounts can help society move towards greater sustainability.

CHAPTER

1

National Environmental Accounts

The term environmental accounts refers to information systems that link environmental and economic data at the national level, including the national income accounts and related satellite accounts. A system of accounts differs from a simple database in several key respects. Accounts are comprehensive in coverage rather than focusing on only a subset of the domain. All flows through an accounting system must be included, and the flows must balance. For example, in business accounts, the sources and uses of income must balance; expenditures cannot be greater or less than revenues, even if the breakdown on each is not very detailed. An accounting system is an invaluable management tool because its framework incorporates all of the issues to be addressed, even if it covers some in much greater detail than others.

Environmental accounting systems are related to a number of other systems of information, assessment, or measurement, including indicators, analytical work, and macroeconomic models. Although this book focuses primarily on the accounting systems themselves, it considers related kinds of information as well. At their broadest, environmental accounting systems cover the entire economy and are the basis for calculating national indicators of resource use, environmental quality, and sustainability. The data underlying these national indicators are often at least as useful for policy purposes as the aggregates, however. The book therefore gives considerable attention to building blocks of the accounting system and their use in policy analysis and environmental-economic modeling.

The national accounts can be used to calculate broad indicators, but often these do not meet the hopes of environmentalists who are critical of conventional economic indicators. Thus the book also looks at some of the other aggregate indicators of sustainability that have been suggested to meet environmental needs, even though most of them cannot be calculated based on the environmental accounts. It is important to understand not only what we hope the accounts might do, but also the reasons behind their limitations; understanding why they cannot directly provide sustainability measures is an important part of this concern.

Methods for environmental accounting have been the subject of considerable debate over the past 20 years. Although the methods being developed and implemented through the United Nations and the European Union have been accepted to some degree, those organizations have not yet reached consensus on many of the details. Outside of those groups, there is not even consensus on the broad conceptual approach. Because the UN and EU methods are being implemented by many national governments, however, they are likely to have more impact than other approaches to environmental accounting and are therefore the focus of much of this book. Other approaches are also considered, however, particularly those of the U.S. National Research Council and Bureau of Economic Analysis, which are linked more closely to economics than to national income accounting. This book does not endorse one methodology over another; rather, it explains the conflicting approaches to help the reader understand how and why they differ and how each might be useful for policy purposes.

Origin of the National Income Accounts

The environmental accounts, sometimes referred to as “green accounts,” are an extension of the national income accounts to incorporate environmental concerns. The national accounts are a system of economic data used to track the evolution of the economy as a whole. They are the basis for calculation of familiar indicators such as gross domestic product (GDP), economic growth rates, and productivity figures. The data in these accounts are also used for a wide range of analytical purposes, which makes them crucial in the development of economic policy.

The idea of developing national income accounts goes as far back as the eighteenth century, when people became interested in calculating national income because they wanted to understand why neighboring countries were more prosperous than their own. The devastating poverty of the Great Depression and the staggering costs of World War II pushed governments to begin calculating their income and building the data systems that would become the accounts. Reeling from the Depression, they needed to know how or when the economy might create more jobs and wanted to be able to predict when such a blow might strike again. Shortly thereafter, faced with the war, they scrambled to figure out how—or whether—they would ever be able to pay what it was going to cost to fight. Immediately afterward, they were confronted with paying for the staggering reconstruction and reparations entailed by the war.

During the Depression and the war, countries worked in relative isolation on the development of theoretical approaches and the calculation of their incomes. In the aftermath of the war, however, economists and statisticians turned their attention to standardizing the system so that the resulting data and macroeconomic indicators could be compared among countries. The first step in this direction was a League of Nations report published in 1947, an annex of which showed how to calculate national income and gross national product and how to present the corresponding national income statistics in a series of tables. The Organization for Economic Cooperation and Development (OECD) joined the debate with the publication of its recommendations in 1952, and in 1953, the Statistical Commission of the United Nations officially endorsed a system of six standard accounts for international use (de Vries et al. 1993).

The 1953 System of National Accounts (SNA) was used for some 15 years, during which time extensive additional work was done to refine the system. The next major revision was published by the United Nations in 1968. It called for much additional information and new ways of presenting this data, as well as disaggregation of information that was available in the 1953 version. The economists, accountants, and statisticians who developed the 1968 SNA did not consider it final, however, and described the next steps to be taken to further refine many aspects of the system. Although the 1968 version was considered appropriate for all free-market economies, its authors suggested adaptations that might be made by developing countries to suit their particular situations. Moreover, it was not used by socialist countries, which based their accounts instead on the material product system, whose total income figures were not compatible with those of the SNA.

Which criticisms drive the design of environmental accounts matters, because the critics approach the accounts in radically different ways.

The most recent revision of the SNA was published in 1993 (hereafter referred to as the 1993 SNA or simply the SNA). It was prepared by the Commission of European Communities (CEC), the UN, the World Bank, the International Monetary Fund (IMF), and the OECD. It goes far beyond the 1968 revision and incorporates information on population and the labor force that was addressed separately in previous revisions. It also makes some initial recommendations on resource accounting, as well as preliminary suggestions not officially endorsed by the Statistical Commission concerning environmental accounts (CEC et al. 1993).

Why Change the SNA?

Interest in integrating the environment into the national income accounts comes from a range of sources and is driven by a number of criticisms of the conventional SNA. Some of the criticisms are sweeping, but others are fairly modest; some are shared by many people, but others are not. Which criticisms drive the design of environmental accounts matters, because the critics approach the accounts in radically different ways. Moreover, the different criticisms do not lead to consensus on how the accounts should be changed; a wide range of quite different strategies might be tried, depending on how one views the problems.

One concern shared by all supporters of environmental accounts is that the SNA treats natural assets such as forests and fisheries differently from manufactured assets such as factories and machines. The conventional accounts follow business accounting practices, subtracting the depreciation of manufactured assets to calculate net income. The argument for environmental accounting is that natural resources such as forests should be treated in the same way. If trees were harvested at the rate they grew back (the level of sustainable yield), the forest could produce income every year. If the whole forest is cut down in two years, however, it will no longer keep producing, and the natural asset will have been consumed. For consistency, this should be treated in the accounts as depreciation (or depletion, for natural resources) of an asset. The SNA does not do that. Instead, it treats the sale of all the timber in the forest as income. Thus income would appear to be very high the two years the forest is cut down and would drop precipitously in the third year.

A second criticism of the conventional accounts relates to the treatment of expenditures to protect against environmental harm, so-called defensive expenditures. Critics argue that defensive expenditures should be subtracted out of the calculation of GDP because they do not contribute to our well-being. Rather, they are necessary to prevent us from being worse off because of the harm our economic activity causes us. This view is a matter of considerable dispute, however, with others arguing that although GDP is indeed used as a proxy for well-being, it was designed to measure income and should continue to do so. Thus even if defensive expenditures do not contribute to well-being, they do contribute to income and should therefore not be subtracted out of GDP

This suggests a third criticism of the conventional accounts. Some people argue that because GDP and other macroeconomic indicators are used as if they measured welfare, they should be modified so that they actually do measure welfare rather than economic output. Others suggest that the macroeconomic indicators should be modified to measure a concept distinct from either output or welfare, that of sustainable income. These views have led to development of alternate indicators, including the Measure of Economic Welfare (Nordhaus and Tobin 1973), the Index of Sustainable Economic Welfare (Daly and Cobb 1994), and the Genuine Progress Indicator (Anielski and Rowe 1999), all of which are addressed in the last chapter of this book.

A more diffuse aim for the environmental accounts is that they should let us know whether our income is sustainable.

Another hope is that the environmental accounts will provide systematic data on the value of environmental goods and services that are not bought and sold in markets and therefore are not included in the conventional SNA. Although some non-marketed products, such as crops grown for consumption by the growers (or own consumption, as this is called in the SNA), are included in the SNA, others, such as watershed protection by forests and absorption of pollutants by water and air, are not. A corresponding hope is that the accounts will let us distinguish the harm done by pollution, much of which entails the loss of these nonmarketed goods and services. This would make it possible to put economic growth in a cost-benefit framework, as we would be able to identify not only what we gain from the environment, but also the loss of valued goods and services that have no market price.

A more diffuse aim for the environmental accounts is that they should let us know whether our income is sustainable or provide an environmentally adjusted “green GDP.” This goal comes in part from people who believe that conventional GDP and other macroeconomic measures send incorrect economic signals because they do not take into account the economic contribution of the environment or the impacts of economic decisions on the environment. The hope is that a green GDP significantly different from the conventional one would be followed by significantly different economic decisions, as the importance of the environment to income became clear.

Among the less ambitious hopes concerning the environmental accounts is that they will make it easier to disaggregate environment-related expenditures within the national income accounts. Thus they would identify (though not subtract) expenditures by industry and households to prevent environmental harm, expenditures to clean up the environment once it has been harmed, and so on. As these are marketed expenditures, they are already in the accounts, and identifying them will not have any implications for the bottom line. It would, however, make it easier to determine the cost of protecting the environment and cleaning up the degradation we already have.

Some advocates of environmental accounting are interested primarily in data expressed in physical rather than monetary terms. Thus they want environmental accounts to be parallel or satellite accounts providing data on the quantity of resources consumed, the quantity of pollution emitted, and other physical measures. Although they would not lead to new monetary measures, such systems could be very useful in understanding relationships between the economy and the physical environment.

Sustainable Income and the Environmental Accounts

The link between environmental accounts and the measurement of sustainable income has received considerable attention from both environmentalists and economists and therefore warrants additional discussion. The conceptual work on this issue is largely in the field of economics, focusing on how sustainable income should be measured and how such measures relate to the macroeconomic measures of the national income accounts. (For a good nontechnical overview of the issue, see Appendix A in Nordhaus and Kokkelenberg 1999.) An important theoretical result in economics shows that under a set of specific, restricted conditions, the net national product measure of the national accounts would actually be a measure of sustainable income (Weitzman 1976). Among the conditions are that all forms of capital (including environmental assets) be included in the accounts; that markets capture social as well as financial values; that the accounts track all resources that can be consumed, whether they are sold or free; and that population be constant. Obviously, these conditions are an ideal, not a reality. Fundamentally, however, economic approaches to accounting are designed to make the accounts match these conditions as much as possible. If they succeed, then the macroeconomic measures based on the accounts could be useful indicators of sustainable income.

The environmental work on sustainability and accounting may be rooted in some of the same theory, but it tends to be more applied. Such efforts have proposed the design of specific national measures of sustainable income or welfare that build on environmentally adjusted national income accounts, adding in measures of other social values. (See, e.g., Daly and Cobb 1994; van Dieren 1995.) Environmental work also has proposed the establishment of systems to track physical use of the environment and to build indicators in physical units. (See, e.g., Adriaanse et al. 1997; Heinz Center 2002; Matthews et al. 2000; Wackernagel and Rees 1996.)

At its simplest, those who argue for sustainability want to know that society as a whole will be as well off in the future as it is now. That can mean that we will continue to be able to consume at current levels; we are not using up our resources now at the expense of the future. How to define “well off” is open to much discussion. It is generally taken to incorporate both monetary income and the enjoyment we get from nonmarketed functions provided by the environment, although the relation between the two is not defined. A wide range of assumptions could be made about the conditions required to sustain both of those elements. Some people might argue that it would not be possible to sustain monetary income and environmental quality in a society characterized by inequity, poverty, or powerlessness. Others might focus on specific components of our enjoyment of the environment, considering whether we can exchange one for another or for more monetary income. Economists focus on the distinction between sustaining well-being and sustaining wealth. Clearly there is room for considerable diversity of opinion concerning what we actually want to sustain.

Link between Asset Depletion and Definitions of Sustainability

Economists working on sustainability often rely on the definition of income suggested by John Hicks (1939,173), as the amount a person can consume in one time period and still be able to earn as much from his or her capital at the end of the period as at the beginning. This is referred to as Hicksian income. Conceptually, this is the same as the description just suggested—the level of consumption that can be maintained while ensuring that well-being will not decline in the future. Much work in economics equates future well-being with maintaining current wealth, because it is our wealth (or assets) that generates revenue flows from which we can consume in the future. Thus sustaining our income in the future is sometimes equated with maintaining the value of our assets in the present.

Tracking the value of assets over time is therefore a major issue in environmental accounting and one of the significant links between the environmental accounts and sustainability. The conventional accounts recognize that the consumption of assets should not be treated as income and therefore deduct the depreciation of capital equipment before calculating income. As mentioned earlier under Why Change the SNA?, however, they do not deduct the depletion of natural capital. Therefore, the net income measures in the conventional accounts (net of depreciation) cannot be considered a measure of Hicksian income, because they do not in fact adjust for all consumption of capital. One of the key adjustments that must be made to develop a measure of sustainable income, therefore, is to deduct the depletion of natural resources.

Interpreting any monetary indicator as a measure of sustainable income depends on acceptance of what is termed weak sustainability, or the idea that all forms of capital are interchangeable for the purpose of estimating wealth, changes in asset values, and sustainable income. Thus a country that sold all of its forests and invested the proceeds in an equally profitable manufacturing industry would be following a weakly sustainable economic policy as long...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Preface
• 1. National Environmental Accounts
• 2. Concepts of Conventional National Income Accounting
• 3. Structure of the Conventional Income Accounts
• 4. Overview of the Revised SEEA
• 5. Pollution Accounting: The Physical Side
• 6. Pollution Accounting: What Are We Spending Now?
• 7. Pollution Accounting: Policy Questions
• 8. Resource Accounting
• 9. Forest Accounts
• 10. Subsoil Asset Accounts
• 11. Fisheries, Land, and Water Accounts
• 12. Macroeconomic Indicators in the SEEA
• 13. Macroeconomic Measures outside the SEEA
• Notes
• References
• Abbreviations and Acronyms
• Glossary
• Index