General Practice, Solo & Small Firm DivisionMagazine

 
Volume 17, Number 6
September 2000

ENVIRONMENT, ENERGY, AND RESOURCES LAW

ACCOUNTING FOR THE ENVIRONMENT NEW DIRECTIONS FOR THE UNITED STATES?

Joy E. Hecht

In 1999, the National Academy of Sciences released a panel report on environmental accounting. The report, Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment, recommends how the United States should mainstream environmental concerns into economic data systems and, thus, into public decision-making. The report calls for links between environmental and economic issues that are radical compared with the overwhelming focus of conventional public decision-making on financial gain and loss. It challenges the government to develop reliable methods to value services of air, water, and soil that we now take for granted, and to determine the true social value of mining, logging, and grazing rights that we now virtually give away to private interests. With such information routinely produced and easy to tie into conventional financial figures, we would be empowered to make decisions based on a full and rich understanding of the value of the environment. This information could change the way the country manages its environment and natural resources.

"Environmental accounting," sometimes called "green accounting" or "green GDP," is the effort to integrate environmental issues into the System of National Accounts (SNA) or to build information systems on environmental issues that can be linked to economic data. The SNA is an accounting system analogous to corporate accounts but used to track an entire country’s economy rather than an individual firm’s financial status. Data in the SNA are used to calculate important macroeconomic indicators such as gross national product, savings and investment rates, and growth rates. Detailed data underlying these indicators are also used for a wide array of policy analysis and economic monitoring purposes. Because they are comprehensive, comparable across countries, and available for long time series, these data are crucial to management of the economy and the evaluation of policy on issues from industrial development and employment to trends in the cost of living.

The environmental accounting movement emerged because these powerful information systems pose several problems. As an indicator of social welfare, measures such as GDP are inadequate because they do not address the impact of economic activity on the environment and public health or on such social problems as crime and family breakup. With respect to the impact of economic activity on the environment and public health, these traditional measures are deficient in many ways. First, environmental protection expenditures such as investments to control pollution are included in accounts as intermediate or final consumption, but it is not possible to disaggregate them in order to identify the costs of environmental protection. Second, the accounts omit both the value the environment provides by its absorption of pollution and the costs imposed by pollution. Third, national income accounts usually cover only goods that are sold in markets; valuable products such as gathered fuel and food are often omitted. Similarly, the environment provides unsold services, such as watershed protection by forests or water filtration by submerged vegetation, that also are not picked up in the national accounts. Finally, traditional accounts do not address depreciation of natural resources.

How Should We Change the System of National Accounts? There has been considerable debate over strategies for modifying the SNA to be able to introduce the goods and services provided by the environment. The environmental accounts under construction can be grouped into five categories: disaggregation of conventional national accounts, natural resource accounts, emissions accounting, valuation of nonmarket goods and services, and "green GDP." The disaggregation of national accounts involves identifying environment-related expeditures already in the conventional accounts, such as environmental protection expenditures, contributions to economic output of sectors with the greatest dependence or impact on the environment, output of the environmental protection sector, trade in environmental protection products, capital formation for environmental protection, and environmental charges and subsidies.

Natural resource accounts allow us to understand whether we are sustainably using our forests, minerals, or grazing lands and whether we are properly pricing them. They include physical data and often also include monetary values for the stocks and flows. Accounts expressed in monetary terms estimate the depreciation of natural assets, using methods that parallel the depreciation of manmade capital in conventional accounts.

Emissions accounting expands national income accounts to establish a link between pollutant emissions and economic activity. This has been done primarily for industrial air pollution, through the efforts of a number of European countries. They identify individual pollutants and group them into composite climate change indicators, linking both the emissions and the indicators to specific industrial sectors.

The value of non-marketed goods and services should be part of our economic accounting system, because these items are scarce and do have economic value. However, because the valuation methods are not consistent or standardized, it will take much additional work before such data can reliably be included in the accounts.

Discussions of environmental accounting always touch on calculation of adjusted macroeconomic indicators, but there is much controversy about how and whether or how this should be done. While "green GDP" has clear appeal to draw attention to environmental issues, experts in the field are not sure such a measure would actually be meaningful. The UN’s System of Integrated Economic and Environmental Accounting (SEEA) proposes that the depreciation of natural assets and the costs of eliminating pollution be subtracted from conventional GDP; however, even UN statisticians agree that this does not measure what GDP would be if stricter environmental rules were implemented. Economists have developed a number of modeling approaches to estimate sustainable income, but these go far beyond routine accounting. For these reasons, few countries have actually calculated green GDP figures in their environmental accounts.

NAS Expert Panel Recommendations. The NAS panel was created in response to congressional concerns about the work of the Bureau of Economic Analysis (BEA), the arm of the Commerce Department that prepares the U.S. national accounts. The panel recommended that BEA minerals accounts, which had been suspended while the study was in process, be resumed; and that BEA plans for more extensive accounts be implemented. It also called for resumed funding of data collection on environmental protection expenditures. Beyond this, it called for all of the elements discussed above except the calculation of green GDP.

The panel distinguished bet-ween two approaches to building the accounts, "phased" and "comprehensive." In the phased approach, countries build their accounts progressively, beginning with components of greatest environmental importance or those that are easiest to build. In contrast, the comprehensive approach recommended by the panel aims to cover all components from the start, arguing that we can’t tell which elements have the greatest economic importance until the accounts are built. In recommending the comprehensive approach, the panel called for the development of methodologies for valuing nonmarketed economic goods and services to begin at once. It explicitly recommended that these imputed values be included in the accounting framework, rather than kept outside of it as a research activity. In a concession to the uncertainty of these methods, however, the panel recommended that valuation rely, to the extent possible, on market-based methods and that contingent valuation not be used.

Dr. Joy E. Hecht is with IUCN/ The World Conservation Union and can be reached at jhecht@capaccess.org.

This article is an abridged and edited version of one that originally appeared on page 179 of Natural Resources & Environment, Winter 2000 (14:3).

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