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2 Material Flows Accounting Definitions and System Structures n its simplest sense, material flows accounting is a method for tracking the movement of matter into and out of a system of interest from and to the environment, using methodically organized accounts, and de- noting the total amounts that remain in the system to create a stock. For clarity (adopted from Eurostat, 2001), material inputs to a system gener- ally include all solid, liquid, and gaseous materials that enter the economy for further use in production or consumption processes. The materials may or may not be toxic or hazardous in nature, or potentially so, and the flows may range from very large to trace levels. Outputs to the environ- ment generally include all materials that flow into the environment from the system either during or after production or consumption processes. One of the purposes of establishing a material flows accounting system is for examining flows to achieve a mass balance for one, some, or all mate- rials of interest, which requires memorandum items for balancing. Memo- randum items are generally associated with an accounting system and would include, for example, the input of oxygen for combustion and biometabolism, the input of water for evaporation by animal and human metabolism, the output of water vapor from combustion, and the output of water evaporation from animal and human metabolism. The system may be defined at various levels. For example, there can be national accounts for tracking flows at the level of a national economic system, comparable regional or state accounts, and corporate or even fa- cility-level accounts defined in terms of the corporate or facility bound- aries instead of geopolitical boundaries. However, there are different defi- 17

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8 MATERIALS COUNT nitions and interpretations of material flows accounting, and it is impor- tant that appropriate terms be defined and used. Confusion about terms will too easily translate into confusion about the nature of data collection and general program development that is being recommended by the committee. Clear definitions are also impor- tant to distinguish the accounting function from the use of data in mate- rial flows analysis the subject that tends to dominate the literature. With- out clear definitions of the various levels of material flows accounting, it would be difficult to properly structure a detailed discussion of benefits, reach conclusions, and make recommendations. This chapter therefore begins with an examination of existing definitions, before focusing on pro- posed definitions and a conceptual framework for use in the United States. ACCOUNTING VERSUS ANALYSIS Material flows data are often organized into accounts (e.g., flows of individual materials, flows in an industrial sector) that serve as the struc- tured, formal repository of targeted data, making them accessible and use- ful while preserving this integrity through agreed accounting principles and practices. Whether considering national, regional, company, or facil- ity-level accounts, material flows accounts provide the basis for tracking, comparing, and managing operational and environmental performances. On a theoretical basis when material flows are organized into ac- counts, they are in some senses similar to financial accounts, a routine part of the business of corporations, governments, and organizations of all kinds. Financial accounts include information such as the balance be- tween revenue and expenses, cash flow, reserves, and competitive finan- cial position, and generally accepted accounting practices and definitions govern them. Decision makers rely on this information so heavily that our modern world is essentially unthinkable without it. Important trends in the economic or financial status of individuals, businesses, regions, states, countries, and coalitions (e.g., European Union) can be tracked accurately. As with financial accounts, material flows accounts include inputs, out- puts, and accumulations in stocks and could, if implemented through well-defined procedures, become critical for calculating mass balances for targeted systems, creating trends in various derived indicators, planning public policy initiatives, and making decisions on key public policy is- sues. As with financial accounts, national and international agreements could be developed for populating, reporting, and auditing material flows accounts. Material flows analysis, in contrast, most often deals with specific problems, regions, or materials, which means a much more focused ap-

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 19 preach. The work of the U.S. Geological Survey provides many examples of regional studies, including material flows research programs on aban- doned mine lands, wetlands loss studies in the oil fields of south Louisi- ana, and natural resources damage assessment studies in Texas (Brown et al., 2000~. Other excellent examples of substance-specific analyses are those dealing with arsenic, lead, and mercury, referenced elsewhere in this report. "Inherent in materials flows analyses is the need for reliable, consis- tent data" (Wagner, 2002~. The presumption is that good material flows analyses are dependent on good data being captured and maintained in material flows accounts. Ultimately the usefulness of material flows analy- ses depends directly on the quality of material flows accounts. EXISTING DEFINITIONS Three useful sources of definitional information are the New lersey INFORM report, Tracking Toxic Chemicals: The Value of Materials Account- ing Data (Dorfman and Wise, 1997~; the international collaborative study on resource flows, Resource Flows: The Material Basis of Industrial Economies (Adriaanse et al., 1997~; and the European Union methodological guide for economy-wide material flows accounts, Economy-wide Material Flow Accounts and Derived Indicators: A Methodological Guide (Eurostat, 2001~. In this section, these sources are used to highlight definitional distinctions and related issues relevant to this study. INFORM Report New lersey established a material tracking database, rather than a material flows accounting system, for toxic chemicals as a result of the 1984 Worker and Community Right to Know Act (P.L. 1984, c. 315, N.r.S.A. 34:5A-l.1 et seq.~. This law required facilities to report quantities of chemi- cals transported into or out of a manufacturing facility, chemically con- verted in the production process, stored on-site, or generated as waste either to be released to the environment or transported off-site for recy- cling, treatment, or disposal. New Jersey's law requires reporting of the same substances as the U.S. Environmental Protection Agency's Toxics Release Inventory, but with considerably more detail regarding the flow characteristics (Sidebar 2.1~. Materials tracking under this requirement can be described as a systematic tracking of raw materials and products as they move sequentially from one end of a facility to the other (Dorfman and Wise, 1997~.

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20 MATERIALS COUNT

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~~[ F[~ ~CCO~G DEWS ~~ Saw SIRES 21 Energy t ~ Recover ~ red Bought \ On-S11n / ~ ~ ~ . Starting inventory ) P~u~d I 11 1j Consumed

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22 MATERIALS COUNT International Collaborative Study on Resource Flows Responsive to the pressures of population growth and related eco- nomic, social, and environmental issues, an international collaboration evolved among Dutch, German, Japanese, and U.S. research institutes (Netherlands Ministry of Housing, Spatial Planning, and the Environ- ment; Wuppertal Institute; National Institute for Environmental Studies; and World Resources Institute, respectively). The report Resource Flows: The Material Basis of Industrial Economies (Adriaanse et al., 1997) was writ- ten in an attempt to find "broadly acceptable new approaches and power- ful new insights that can stimulate the global transformation" of societies. In their joint work, the collaborators defined terms relating to mate- rial requirements in national economies, suggesting a set of physical ac- counts paralleling conventional national economic accounts. These terms include hidden flows, direct material input, and total material require- ment. Hidden, often called indirect, flows are comprised of excavated and/or disturbed material flows and ancillary material flows, both of which are also defined. The group did not explicitly define a material flows account, or accounting, but the definitions provided set the stage for those subsequently developed as part of a European Union material flows accounting program. European Union Guidelines The European Union (KU) participates in a number of EU-wide and international environmental accounting activities. As a response to the policy demand for resource use indicators, Eurostat has developed a framework and guidance for establishing material flows accounts and material balances for the economy (Eurostat, 2001) (Sidebar 2.2~. Repre- senting a synthesis of already implemented material flows accounting systems among European Union member states, the guide is the first step toward uniform terminology, concepts, and a set of accounts and tables. The European Union guidelines describe the key terms as follows: Economy-wide material flows accounts and economy-wide mate- rial balances ". . . show the amounts of physical inputs into an economy, material accumulation in the economy and outputs to other economies or back to nature. . ." (Eurostat, 2001~. Physical input-output tables are ". . . the most comprehensive de- scription of material flows between environment and economy as well as within the economy, distinguishing not only categories of materials but also branches of production" (Eurostat, 2001~.

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 23 input domestic \ _ extraction: \ _ fossil fuels mi nerals hi amass unused domestic extraction | imports economy output material accumulation (net addition to stock) material throughput (per year) to nature: \ emissions to air \ waste landfilled > emissions to water / dissipative flows / unused domestic extraction

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24 MATERIALS COUNT The following is especially critical to the committee's understanding of the European approach to material flows accounting and to the defini- tions proposed for use in the United States (Eurostat, 2001~: Only flows are counted that cross the system boundary at the input side or at the output side. Material flows within the economy are not pre- sented in economy-wide MFA [material flows accounts] and balances. Therefore, inter-industry deliveries of products, for example, are not de- scribed. However, they are described in Physical Input-Output Tables. A later section contains the more explicit statement that "in economy- wide MFA the whole economy including production and consumption activities is a single black box. Only flows that cross the system boundary of the economy are recorded" (Eurostat, 2001~. In summary, the European Union makes a distinction between mate- rial flows accounts and physical input output tables: Material flows accounts cover flows into and out of the economy as a whole as well as accumulations. Physical input-output tables cover all of the flows internal to the economy as well as flows between the environment and the economy. PROPOSED DEFINITIONS The New lersey, European Union, and other materials examined by the committee use the term material flows accounting to refer to methods for tracking the movement of materials from and to the environment, into and out of systems at various levels, from the nation to the facility. Care should be taken not to infer more than is meant by the term. There is no universally understood, more specific meaning for the term. To be more specific, a modifier, such as economy wide should be used, thereby mak- ing clear the boundaries and probable content of a given material flows account. nology: The committee agrees on the following definitions and general termi- 1. Use terms such as "material flows accounting" and "material flows data," when writing generally about tracking material flows in physical terms. 2. Attach specific modifiers, such as "economy-wide," "national,", or "regional," to clearly define the boundaries for a specific set of material flows accounts. 3. Adopt the "black box" approach to material flows accounts for a

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 25 specified system (i.e., national, regional, or other specific system for which accounts are developed). 4. Use the physical input-output table terminology for material flows accounting within a system. This matches the economic input-output table terminology already in widespread use, making it easier to discuss the relationships between these two approaches to the same subset of flows. It also avoids confusion about the level of accounting data to which a . . . . given passage IS relerrmg. CONCEPTUAL FRAMEWORK Consistent with the Eurostat conceptualization of material flows ac- counts on an economy-wide basis (Eurostat, 2001, Figure 1, p. 9), the basic material flows concept is illustrated in Figure 2.1 for a generalized sys- tem. The figure shows the extraction of materials from the environment that flow directly into the economy or system of interest; material flows across the boundary of the system in the form of imports and exports; flows back to the environment in the form of emissions to air, water, and land; and the accumulation of material stocks. Stock accumulation can take any of a large variety of forms, from buildings to cameras, with mate- rials routinely flowing into and out of the stock. Recycling and reuse rep- resent a specific subset of material flows that contribute to maintenance of the stock of a material, without requiring additonal extractions or inflows of that material. The figure also shows indirect, or hidden, flows associated with ex- traction, imports, and exports. As noted previously, hidden flows are com- prised of excavated and/or disturbed materials and ancillary material flows that are ignored in economic flows accounts because they do not have economic value. An example of a hidden flow is the relocation of soil and rock strata that overlay a mineral deposit. The material must be re- moved before the ore can be extracted and used. The inclusion of such indirect flows is an important aspect of material flows accounting the focus is on all material flows, not just those with economic value. This is the case even for imports, where the indirect flows are incurred outside the system. The task of material flows accounting is to track all of these flows at a reasonable or practical level of detail for the system of interest. The feasi- bility of details may be related to the cost-benefit analysis of undertaking the effort, the adverse or beneficial impact on public health or the envi- ronment, or another rational evaluation. National accounts tracking these flows can be linked to form global accounts, just as regional accounts can be linked to trace flows through the national system more precisely. As noted earlier, material flows accounts are distinguishable from

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26 DOM ESTIC EXTRACTION Direct Indirect IMPORTS Direct > Indirect MATERIALS COUNT SYSTEM BOUNDARY A / Stock \ / Accumulation\ Emissions tft lit Emissions to water and land EXPORTS Hi rant indirect FIGURE 2.1 The basic concept of material flows as related to adopted definitions. physical input-output tables, which give details on physical flows among and within sectors in a system of interest. Physical input-output tables, in turn, can be linked with economic input-output tables, which track only the economic flows or exchanges within the system in monetary terms (see Chapter 3~. For example, an economy-wide material flows account for copper might trace the following: the flow of copper into the national economy as domestic input (e.g., from an Arizona copper mine) or through imports (e.g., from Chile); related hidden or indirect flows (e.g., overburden removed during mining and the waste portion of copper ore) and emissions (e.g., to air, from mine roadways, mill operations, refining); the totals that remain in the stock of products (e.g., autos), without distinguishing the products; and flows out of the economy as exports (e.g., in the form of finished products containing copper). In contrast, a physical input-output table for copper would trace the following:

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 27 flows of copper into and within the national economy from foreign or domestic sources, including hidden or indirect flows; the use of copper on a sector-by-sector basis (e.g., by the automo- tive industry, by the producers of wiring); flows from one sector to another through economic transfers (e.g., sale of wiring to the automotive industry), recycling, or reuse; and flows out of the economy, including hidden or indirect flows. The corresponding economic input-output table could trace the fol- lowing more restricted set of transfers: transactions covering the sale of copper among extractors, refiners, and basic processing or fabricating operations; sales of semi or fully manufactured copper products to final prod- uct manufacturers (e.g., sales of copper wire to the automotive industry, at which point copper is likely to be only one component); sales of final products (e.g., autos to consumers, at which point copper is likely to be a minor component); and possibly the sale of salvaged copper to refiners or other users. The general relationship between material flows accounts and physical input-output tables is illustrated in Figure 2.2 by superimposing a grid 1 System Boundary t . ~ .. Physical Input- Output Table FIGURE 2.2 Relationship of physical input-output tables to material flows ac- counts. The major arrow and triangle figures represent the same entities as shown in Figure 2.1.

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28 MATERIALS COUNT pattern representing the physical input-output table within the bound- aries of the system of interest. The major arrow and triangle figures repre- sent the same entities as shown in Figure 2.1. The input-output tables would in reality be made up of many matri- ces, with rows and columns capturing the flows within and across sectors. For example, one subtable of a full physical input-output table could show the flows of individual nonferrous metals to various sectors and to branches within a sector; the flows of products containing the metals be- tween sectors and as final products for consumption; and the flows of residuals to air, land, and water. Other subtables would cover flows of biomass, construction materials, fossil fuels, and ferrous metals. In short, physical input-output tables could show either the relationships across sectors and/or branches of the economy or among material groupings (i.e., materials used to produce other materials). Like a material flows account, a physical input-output table covers hidden or indirect flows as well as flows that have monetary value. In contrast, an economic input-output table covers only those flows that re- flect measurable economic transfers and would therefore correspond or map to only the portion of the physical input-output table that represents economic flows (Figure 2.3~. Other parts of the physical input-output table 0000 - . ~ E.co.n.o-m..ic...:-...~--np.u-t- ... - -- - - - ---- - -- ::- -- OutputThbl~e Phvs-i~cal.-..l-n.l3...ut-- ~ - . ~ . Outout Table System Boundary ~ . m FIGURE 2.3 The relationship among economic input-output tables, physical put-output tables, and material flows accounts. The major arrow and triangle fig- ures represent the same entities as shown in Figure 2.1. 1n-

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 29 represent the hidden flows and the outputs of residuals and pollutants from the economy to the environment. In addition, a physical input-out- put table can capture flows of natural materials through natural processes, including the "grand cycles" of water, nitrogen, phosphorus, and other materials through the natural Earth system. The linkages between the economic and physical input-output tables represent both an important way of describing the implications of mate- rial flows for economic systems and an important research agenda. The research agenda is especially critical because conventional economic mea- surement and tracking account for a relatively small proportion of total flows, whereas it is the total flows that go to the heart of economic, envi- ronmental, and social sustainability. Research issues are presented com- prehensively in Chapter 7. DETAILS OF ACCOUNTING SYSTEM STRUCTURE Beginning with Austria, the structure of economy-wide material flows accounts has been explored in Europe since the early 1990s (Steurer, 1992~. A parallel effort was pursued in Japan during the same period (Japanese Environmental Agency, 1992~. In ensuing years, similar developments occurred in seven other European Union countries, and the efforts have culminated in the drafting of a European Union guidelines document (Eurostat, 2001), which synthesizes among member states a formal struc- ture for system accounts and procedures for using them. In the United States, New Jersey implemented a materials tracking system focused on toxic materials, expanded beyond Environmental Pro- tection Agency's Toxics Release Inventory, and Massachusetts imple- mented a system that collects data that give "the most complete picture of the conditions of use of a chemical at a facility, obtaining a description of each process (production unit), the range of amount of chemical use, and the percent change in waste by process, instead of facility-wide reporting as in New Jersey" (Dorfman and Wise, 1997~. From these global efforts, significant insight into the structure of material flows accounts for effec- tive use can be gleaned, and the details of two structures developed thus far are presented next. European Union System Structure The detailed structure of proposed material flows accounts, a synthe- sis of approaches by member states of the European Union for eventual standardization, is presented in Chapter 3 of Economy-wide Material Flow Accounts and Derived Indicators: A Methodological Guide (Eurostat, 2001~. In preparing to develop material flows accounts, the structure is defined by

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30 MATERIALS COUNT a detailed classification of material inputs (Appendix C), of material out- puts (Appendix D), and material stock changes (Appendix E). Inputs to the economy-wide system include domestic extraction from the environment of fossil fuels, minerals, and biomass (used and unused [i.e., hidden flowed; imports of raw materials, semi-manufactured prod- ucts, finished products, other products, packaging material, and waste imported for final treatment and disposal; and indirect flows associated with imports (raw material equivalent of imported products and unused extraction of imported products. Memorandum items for balancing in- puts are included. Each of the aforementioned categories is broken down into greater detail, as shown in Appendix C. A similar breakdown applies to material outputs (shown in Appen- dix D). Included are emissions and wastes to air, land, and water; dissipa- tive uses of products and other dissipative losses; exports (same as for imports); disposal of unused domestic extraction; and indirect flows asso- ciated with exports. Memorandum items for balancing are also included. Changes to stock are similarly defined, with details shown in Appen- dix E. Total additions embrace infrastructure and buildings, machinery, durable goods, and so forth. Removals similarly embrace infrastructure and buildings, machinery, durable goods, et cetera, but include dissipa- tive losses. Net additions to material stock are total additions less removals. Because of the enormity of water flows, Eurostat recommended that accounts for water flows be done separately, except for water contained in materials to attain balanced flows. Air was treated similarly, using it to complete material balances under combustion or oxidation situations. Since recycling data are sparse at present in the European Union, Eurostat recommended establishment of subaccounts, which may be implemented in material balance calculations when the accounts are sufficiently developed. New lersey System Structure New lersey's law, mentioned earlier, requires reporting of facilities for chemicals at threshold levels similar to reporting requirements under the Toxics Release Inventory. New lersey facilities have expanded annual reporting, forming a material tracking database, that encompass the fol- lowing data elements for chemicals that must be reported under the Toxics Release Inventory:

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MATERIAL FLOWS ACCOUNTING DEFINITIONS AND SYSTEM STRUCTURES 31 Inputs Starting inventory Brought on-site Produced on-site Recycled on-site Outputs Consumed Non-product output Shipped as (or in) product Ending inventory Details on data collection can be found in Appendix H of Tracking Toxic Chemicals: The Value of Materials Accounting Data (Dorfman and Wise, 1997), which gives New Jersey Department of Environmental Pro- tection form DEQ-114. The figure given in Sidebar 2.1 above highlights the difference between the Toxics Release Inventory data and the New lersey materials accounting data. Facilities covered under the Toxics Release Inventory report data on chemicals (in pounds) only for on- and off-site waste management (recycled, used for energy recovery, treated, and discharged to publicly owned treatment works) and direct releases to the environment (fugitive air emissions, point source air emissions, surface water discharges, injections underground in deep wells, and dis- charges to land). Toxics Release Inventory reporting does not give a com- prehensive picture of toxic substances coming into a plant, being used or consumed at the plant, being stored at the plant, or leaving the plant as (or in) a product. SUMMARY Each of the accounting systems described in this section has a specific scope and related limitations. Economic input-output tables focus on the workings of the economy and track flows that represent only a subset of the total flows of concern from a sustainability perspective. Physical in- put-output tables go beyond the purely economic to capture the full range of flows within a system of interest, but are contained within that system. Material flows accounts operate at a different level of aggregation and offer the opportunity to reach beyond a system of interest, whether from the region to the nation or from nations to a global framework. They pro- vide the basis for linking and integrating the full range of natural and social sciences research and data, and for describing and better under- standing the intricately interconnected network of the global economy and environment as well as their impacts on people. Ultimately the key to forming and using material flows accounts successfully is to collect de- tailed data according to a defined structure on the quantities of targeted materials, their composition, their origin and destination, and other asso- ciated, salient characteristics such as toxicity. The next chapter examines the broader context for material and energy flows information.

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32 MATERIALS COUNT The input-output tables would in reality be made up of many matrices, with rows and columns capturing the flows within and across sectors. For example, one subtable of a full physical input-output table could show the flows of individual nonferrous metals to various sectors and to branches within a sector; the flows of products containing the metals between sectors and as final products for consumption; ant! the flows of residuals to air, lanci, and water. Other subtables would cover flows of biomass, construction materials, fossil fuels, ant! ferrous metals. short, physical input-output tables could show either the relationships across sectors and/or branches of the economy or among material groupings (i.e., materials used to produce other materials). Like a material flows account, a physical input-output table covers hidden or indirect flows as well as flows that have monetary value. In contrast, an economic input-output table covers only those flows that reflect measurable economic transfers and would therefore correspond or map to only the portion of the physical input-output table that represents economic flows (Figure 2.3~. Other parts of the physical input-output table represent the hidden flows anal the outputs of residuals anal pollutants from the economy to the environment. In aciclition, a physical in~?ut-output table can capture flows of natural materials through natural processes, inclucling the "grand cycles" of water, nitrogen, phosphorus, and other materials through the natural earth system. The linkages between the economic and physical input-output tables represent both an important way of describing the implications of material flows for economic systems and an important research agencia. The research agenda is especially critical because conventional economic measurement and tracking account for a relatively small proportion of total flows, whereas it is the total flows that go to the heart of economic, environmental, and social sustainability. Research issues are presented comprehensively in Chapter 7. DETAILS OF ACCOUNTING SYSTEM STRUCTURE Beginning with Austria, the structure of economy-wide material flows accounts has been explored in Europe since the early 1990s (Steurer, 1992~. A parallel effort was pursued in Japan during the same period (Japanese Environmental Agency, ~ 992~. In ensuing years, similar developments occurred! in seven other European Union counties, and the efforts have culminated in the drafting of a European Union PRE-PUBLICATION VERSION, SUBJECT TO EDITORIAL CHANGES