Environmental Accounting : Where We Are Now, Where We Are Heading

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Environmental Accounting
Where We Are Now, Where We Are Heading
by Joy E. Hecht

Interest is growing in modifying national income accounting systems to pro-
mote understanding of the links between economy and environment.
The field of environmental accounting has made
national income accounts, no standard practices exist
great strides in the past two decades, moving from a
for doing so. When nonmarketed goods are included
rather arcane endeavor to one tested in dozens of
in the accounts, they still cannot be distinguished
countries and well established in a few. But the idea
from those that are marketed.
that nations might integrate the economic role of the
Valuing environmental services such as the water-
environment into their income accounts is neither a
shed protection that forests afford and the crop fertil-
quick sell nor a quick process; it has been under
ization that insects provide is difficult. Though some
discussion since the 1960s. Despite the difficulties and
experts call for their inclusion in environmentally
controversies described in this article, however, inter-
adjusted accounts, typically neither the economic
est is growing in modifying national income account-
value nor the degradation of these services is includ-
ing systems to promote understanding of the links
ed. On the other hand, however, the alternate goods
between economy and environment.
and services needed to replace them—water treatment
plants, for example—do contribute to GDP, which can
Why Change?
be rather misleading.
Governments around the world develop economic
Still another problem is that national income
data systems known as national income accounts to
accounts treat the depreciation of manufactured capi-
calculate macroeconomic indicators such as gross
tal and natural capital differently. Physical capital—a
domestic product. Building a nation’s economic use of
building or a machine, for instance—is depreciated in
the environment into such accounts is a response to
accordance with conventional business accounting
several perceived flaws in the System of National
principles, while all consumption of natural capital is
Accounts (SNA), as defined by the United Nations
accounted for as income. Thus the accounts of a
and used internationally. One flaw in the SNA often
country that harvests its forests unsustainably will
cited is that the cost of environmental protection
show high income for a few years, but will not reflect
cannot be identified. Consequently, money spent, say,
the destruction of the productive forest asset. While
to put pollution control devices on smokestacks
opinions vary on how to depreciate natural capital,
increases GDP, even though the expenditure is not
they converge on the need to do so.
economically productive, some argue. These critics
Which Indicators Are Useful?
call for differentiating “defensive” expenditures from
others within the accounts.
Some proponents advocate simple “flag” indicators to
Also misleading is the fact that some environmen-
alert policymakers to the broad role of the environ-
tal goods are not marketed though they provide eco-
ment in the economy, for example, comparing con-
nomic value. Fuelwood gathered in forests, meat and
ventional GDP with environmentally adjusted GDP, or
fish gathered for consumption, and medicinal plants
conventional savings with so-called “genuine” savings
are examples. So are drinking and irrigation water,
that account for environmental factors. Both of these
whose sale prices reflect the cost of distribution and
indicators can provide valuable warnings of the
treatment infrastructure, but not the water itself.
impacts of environmental degradation on an economy.
While some countries do include such goods in their
However, such flags are less useful in determining
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the source of environmental harm or identifying a
many to action, it also operated as a brake, leading
policy response. For this reason, many economists
many economists and statisticians to warn against a
place primary importance not on the bottom line, but
focus on green GDP, because it tells decisionmakers
on the underlying data used to build environmental
nothing about the causes or solutions for environmen-
accounts. These data can help answer such questions
tal problems.
as how natural catastrophes like the fires that raged in
Since that time, several developing countries have
Indonesia in the summer of 1998 may affect economic
made long-term commitments to broad-based envi-
growth, or how environmental protection policies
ronmental accounting. Namibia began work on
such as green taxes may affect the economy.
resource accounts in 1994, addressing such questions
as whether the government has been able to capture
Who Is Doing This?
rents from the minerals and fisheries sectors, how to
Environmental accounting is underway in several
allocate scarce water supplies, and how rangeland
dozen countries, where bureaucrats, statisticians, and
degradation affects the value of livestock.
other proponents both foreign and domestic have
The Philippines began work on environmental
initiated activities over the past few decades. Several
accounts in 1990. The approach used there is to build
countries have made continuous investments in
all economic inputs and outputs into the accounts,
building routine data systems, which are integrated
including nonmarketed goods and services of the
into existing statistical systems and economic plan-
environment. Thus Filipinos estimate monetary values
ning activities. Others have made more limited
for such items as gathered fuelwood and the waste
efforts to calculate a few indicators, or analyze a
disposal services provided by air, water, and land; they
single sector. Some of the earliest research on envi-
then add in direct consumption of such services as
ronmental accounting was done at RFF by Henry
recreation and aesthetic appreciation of the natural
Peskin, working on the design of accounts for the
world. While their methodology is controversial, these
United States.
accounts have provided Philippine government agen-
One of the first countries to build environmental
cies and researchers with a rich array of data for poli-
accounts is Norway, which began collecting data on
cymaking and analysis.
energy sources, fisheries, forests, and minerals in the
The United States has not been a leader in the
1970s to address resource scarcity. Over time, the
environmental accounting arena. At the start of the
Norwegians have expanded their accounts to include
Clinton administration, the Bureau of Economic
data on air pollutant emissions. Their accounts feed
Analysis (BEA) made a foray into environmental
into a model of the national economy, which policy-
accounting in the minerals sector, but this preliminary
makers use to assess the energy implications of alter-
attempt became embroiled in political controversy and
nate growth strategies. Inclusion of these data also
faced opposition from the minerals industry. Congress
allows them to anticipate the impacts of different
then asked the National Research Council (NRC) to
growth patterns on compliance with international
form a blue ribbon panel to consider what the nation
conventions on pollutant emissions.
should do in the way of environmental accounting.
More recently, a number of resource-dependent
Since then, Congressional appropriations to BEA have
countries have become interested in measuring depre-
been accompanied by an explicit prohibition on envi-
ciation of their natural assets and adjusting their GDPs
ronmental accounting work. The ban may be lifted,
environmentally. One impetus for their interest was
however, once the recommendations of the NRC
the 1989 study “Wasting Assets: Natural Resources in
study are made public.
the National Income Accounts,” in which Robert
How to Account?
Repetto and his colleagues at the World Resources
Institute estimated the depreciation of Indonesia’s
How environmental accounting is being done varies in
forests, petroleum reserves, and soil assets. Once
a number of respects, notably the magnitude of the
adjusted to account for that depreciation, Indonesia’s
investment required, the objectivity of the data, the
GDP and growth rates both sank significantly below
ability to compare different kinds of environmental
conventional figures. While “Wasting Assets” called
impacts, and the kinds of policy purposes to which
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Emissions accounting. Developed by the Dutch, the
National Accounting Matrix including Environmental
Accounts (NAMEA) structures the accounts in a
matrix, which identifies pollutant emissions by eco-
nomic sector. Eurostat, the statistical arm of the
European Union, is helping EU members apply this
approach as part of its environmental accounting
program. The physical data in the NAMEA system are
used to assess the impact of different growth strategies
on environmental quality. Data can also be separated
by type of pollutant emission to understand the
impact on domestic, transborder, or global environ-
ments. If emissions are valued in monetary terms,
these values can be used to determine the economic
cost of avoiding environmental degradation in the first
place, as well as to compare costs and benefits of
environmental protection.
Disaggregation of conventional national accounts. Sometimes
data in the conventional accounts are taken apart to
identify expenditures specifically related to the envi-
ronment, such as those incurred to prevent or mitigate
harm, to buy and install protection equipment, or to
pay for charges and subsidies. Over time, revelation of
these data makes it possible to observe links between
changes in environmental policy and costs of environ-
they may be applied. Here are some of the methods
mental protection, as well as to track the evolution of
currently in use.
the environmental protection industry.
Natural Resource Accounts. These include data on stocks
While these data are of obvious interest, some
of natural resources and changes in them caused by
people argue that looking at them in isolation can be
either natural processes or human use. Such accounts
misleading. For example, while end-of-pipe pollution
typically cover agricultural land, fisheries, forests,
control equipment is easily observed, new factories
minerals and petroleum, and water. In some coun-
and vehicles increasingly are lowering their pollutant
tries, the accounts also include monetary data on the
emissions through product redesign or process change
value of such resources. But attempts at valuation raise
rather than relying on special equipment. In such
significant technical difficulties. It is fairly easy to track
cases, no pollution control expenditures would show
the value of resource flows when the goods are sold in
up in the accounts, yet environmental performance
markets, as in the case of timber and fish. Valuing
might be better than in a case where expenditures do
changes in the stocks, however, is more difficult because
show up.
they could be the result either of a physical change in
Value of nonmarketed environmental goods and services.
the resource or of a fluctuation in market price.
Considerable controversy exists over whether to
For environmental goods and services that are not
include the imputed value of nonmarketed environ-
sold, it is that much harder to establish the value
mental goods and services in environmental accounts,
either of the flow or of a change in stock. However,
such as the benefits of an unpolluted lake or a scenic
even physical data can be linked to the economy for
vista. On the one hand, the value of these items is
policy purposes. For example, changes in income can
crucial if the accounts are to be used to assess trade-
sometimes be traced to changes in the resource base
offs between economic and environmental goals.
or to the impact of environmental catastrophes on the
Otherwise, the accounts can end up reflecting the
costs of protecting the environment without in any
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way reflecting the benefits. On the other hand, some
established as the SNA. First, information must circu-
people feel that valuation is a modeling activity that
late freely about existing environmental accounts and
goes beyond conventional accounting and should not
how they are contributing to economic and environ-
be directly linked to the SNA. The concern underlying
mental policy. Ongoing work needs to be identified
their view is that it is difficult to standardize valuation
and systematically reviewed and analyzed to learn
methods, so the resulting accounts may not be com-
lessons, which may inform the design and implemen-
parable across countries or economic sectors within a
tation of future accounting activities. The Green
Accounting Initiative of the World Conservation
Green GDP. Developing a gross domestic product that
Union has embarked on this effort, and a number of
includes the environment is also a matter of contro-
other organizations are calling for similar activities.
versy. Most people actively involved in building envi-
Use of the World Wide Web may facilitate access to
ronmental accounts minimize its importance. Because
unpublished work, although it will require a concert-
environmental accounting methods are not standard-
ed effort to obtain accounting reports and seek per-
ized, a green GDP can have a different meaning in
mission to load them on the Internet.
each project that calculates it, so values are not com-
Second, development of a core of internationally
parable across countries. Moreover, while a green GDP
standardized methods will contribute to willingness to
can draw attention to policy problems, it is not useful
adopt environmental accounting. Experts in the
for figuring out how to resolve them. Nevertheless,
field—including economists, environmentalists, acade-
most accounting projects that include monetary values
mics, and others outside of the national statistical
do calculate this indicator. Great interest in it exists
offices—should take a proactive role in tracking the
despite its limitations.
work of the London Group and insist that the stan-
dard-setting process involve participants representing
Toward Consensus on Method
a spectrum of viewpoints, countries, and interested
Environmental accounting would receive a substantial
stakeholders. An opportunity exists for research insti-
boost if an international consensus could be reached
tutes to take a lead in identifying the financial
on methodology. The UN Statistics Department has
resources needed to facilitate a broader standard-
coordinated some of the ongoing efforts toward this
setting process, and to elicit a full range of voices to
end since the 1980s. In 1993, the UN published the
build a consensus on methodology.
System for Integrated Economic and Environmental
Finally, and perhaps most importantly, the more
Accounting (SEEA) as an annex to the 1993 revisions
countries institutionalize construction of environmen-
of the SNA. SEEA is structured as a series of method-
tal accounts, the greater the momentum for more of
ological options, which include most of the different
the same.
accounting activities described above; users choose the
Still, building accounts—like developing any time-
options most appropriate to their needs.
series statistics—will not happen overnight. Their
No consensus exists on the various methods that
construction will require sustained institutional and
the UN recommended. In fact, SEEA is now undergo-
financial commitment to ensure that the investment
ing revision by the so-called “London Group,” com-
lasts long enough to yield results. But the experiences
prised primarily of national income accountants and
of Norway, Namibia, and the Philippines show that
statisticians from OECD countries. The group’s work
such a commitment can pay off; it is a commitment
will be an important step toward consensus on
that more countries around the world need to make.
accounting methods, but the process will be lengthy:
Development of the conventional SNA took some
forty years.
Joy E. Hecht coordinates the Green Accounting Initiative at the International Union for
Toward Widespread Use
the Conservation of Nature. http://www.iucnus.org/greenacct.html . While on the RFF
A number of steps can be taken now toward the goal
staff in 1980–81, she began working on environmental accounting. This article is
of ensuring that environmental accounting is as well
based on a talk she gave last fall as part of RFF’s Wednesday Seminar Series.
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