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Introduction

The last quarter-century has seen increasing awareness of the interactions between human societies and the natural environment in which they thrive and upon which they depend. This awareness has been heightened by concerns about resource scarcity, environmental degradation, and global environmental issues. The combination of increased awareness of the environment and recognition of the primitive state of much of the nation's environmental data has led to a widespread desire to supplement U.S. national economic accounts to include natural resources and environmental assets. The idea of including environmental assets and services in the national economic accounts is part of a larger movement to develop broader economic indicators. This movement reflects the reality that economic and social welfare does not stop at the market's border, but extends to many "near-market" and nonmarket activities, such as household production, leisure activities, and environmental quality.1

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"Near market," "natural resources," "environmental assets," and other major terms used in environmental accounting are defined in the glossary (Appendix D).



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1 Introduction The last quarter-century has seen increasing awareness of the interactions between human societies and the natural environment in which they thrive and upon which they depend. This awareness has been heightened by concerns about resource scarcity, environmental degradation, and global environmental issues. The combination of increased awareness of the environment and recognition of the primitive state of much of the nation's environmental data has led to a widespread desire to supplement U.S. national economic accounts to include natural resources and environmental assets. The idea of including environmental assets and services in the national economic accounts is part of a larger movement to develop broader economic indicators. This movement reflects the reality that economic and social welfare does not stop at the market's border, but extends to many "near-market" and nonmarket activities, such as household production, leisure activities, and environmental quality.1 1   "Near market," "natural resources," "environmental assets," and other major terms used in environmental accounting are defined in the glossary (Appendix D).

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The National Income and Product Accounts Concepts The modern national income and product accounts are among the great inventions of the twentieth century. Among other things, they are used to judge economic performance over time, to compare the economies of different nations, to measure a nation's saving and investment, and to track the business cycle. Much as satellites in space can show the weather across an entire continent, the national accounts can give an overall picture of the state of the economy. This report addresses the question of whether the U.S. economic accounts should be extended to include activities involving natural resources and the environment. It will be useful at the outset to explain what is meant by "accounting" and by the "national income and product accounts." In its most general sense, the purpose of accounting is to provide economic information about a household, organization, or government. Accounts are generally divided into "income accounts," which record receipts and outlays during a given period such as a year, and ''asset accounts," which provide a snapshot of the assets, liabilities, and net worth of an entity at a given date. People are most familiar with the income accounts and balance sheets of businesses, but the same concepts apply equally well to individuals, governments, and nations. The present report is concerned with a specific set of accounts known as the National Income and Product Accounts (NIPA). The fundamental purpose of the NIPA is to provide a coherent and comprehensive picture of the nation's economy. These accounts measure the total income and output of the entire nation, including households, business and not-for-profit enterprises, and different levels of government. The key elements of the NIPA—what this report calls the "core accounts"—measure the total market output and income of the United States. The most important item is gross domestic product (GDP), a measure of the nation's total output of goods and services and the total income of the nation generated by that output. GDP represents the sum of the dollar values of consumption, gross investment, government purchases of goods and services, and net exports produced within the nation during a given year. It also represents the income earned as wages, profits, and interest, as well as indirect taxes. In addition to the totals for the nation, the NIPA provide a rich array of data on output and incomes in different industries and regions, as well as a record of international transactions. To date, the major focus of the U.S. national accounts has been on developing income accounts, with relatively less attention on asset ac-

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counts. In addition, a central organizing principle of the accounts is that national output is, with a few exceptions, defined to be the production that is reflected in the sales and purchases of the market economy. Indeed, the NIPA's omission of many nonmarket activities—particularly those involving natural resources and the environment—along with the potential distortion in measures of national output and wealth stemming from that omission, is the very concern that led to the environmental accounting addressed in this report.2 History National accounts were first developed by Sir William Petty in 1665, with estimates being primarily the work of individual scholars until World War I.3 There was little appreciation during this period of economic statistics as a public good. Moreover, although there were sporadic federal efforts to develop estimates of national income and output, the impetus for systematic development of the accounts came during the Great Depression. Measures of national output at that time were incomplete and produced with a considerable lag, so policy makers had only an impression of economic trends. The lack of reliable and timely data led to a congressional resolution during the Great Depression, introduced by Senator Robert La Follette: RESOLVED, That the Secretary of Commerce is requested to report ... estimates of the total national income of the United States for each of the calendar years 1929, 1930, and 1931, including estimates of the portions of national income originating from [different sectors] and estimates of the distribution of the national income in the form of wages, rents, royalties, dividends, profits, and other types of payments. The first set of accounts was developed at the Commerce Department under the leadership of Dr. Simon Kuznets, who received the Nobel prize for his pioneering role in that work. The effort was conducted in collaboration with the National Bureau of Economic Research, a private nonprofit economic research organization. The resulting set of accounts was submitted to the Senate in 1934 and published as a Senate document. The major aggregates of the national accounts—including gross national product (GNP) and the division between consumption and invest- 2   For a description of the methodology underlying the U.S. NIPA, see Bureau of Economic Analysis (1995b). 3   The historical discussion that follows is based on Carson (1975).

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ment—date from Kuznets's work in the 1930s. The NIPA aggregates are analogous to a firm's income statement in that they represent economic activity for a period of time, usually a quarter or a year. Over the next decade the accounts were elaborated and redefined. The basic framework delineated in 1947 is discussed in Kuznets (1948c) and has, with a few exceptions, remained virtually intact since that time. The major aggregates today are GDP and expenditure, national income, personal income, and personal disposable income. The nation's asset accounts, analogous to a firm's balance sheet, have also been developed as part of the national accounts. The most developed is a set of capital asset accounts, reflecting a component of the nation's wealth. Augmented National Accounts Background As noted earlier, the traditional national accounts include primarily the final output of marketed goods and services—that is, of goods and services that are bought and sold in market transactions. Notwithstanding the importance of the traditional accounts, it has long been recognized that limiting them to market transactions distorts them as a measure of economic activity and well-being. A vast and rapidly changing amount of nonmarket activity produces goods and services that are quite similar to those produced in the marketplace, but are omitted from traditional accounts. Time spent cooking hamburgers at Wendy's is counted in the national accounts, while cooking time at home is not; nannies' services are reckoned as part of GDP, while mommies' and daddies' services are not; the value of swimming in a commercial swimming pool is captured by GDP, while the value of swimming in a public lake or in the ocean is not. In response to growing concerns about the accuracy of traditional measures of economic activity, many efforts have attempted to broaden the traditional accounts to include important sectors of nonmarket activity beyond the imputations of rent on owner-occupied housing, certain financial services, and the value of home-grown food, all of which were in the earlier accounts. The history of augmented accounting, some of which includes adjustments for the environment, goes back to the early 1970s (Eisner, 1971). Most of the early efforts were undertaken by private scholars. Significant examples of sectors examined in studies addressing extension of the accounts include household production and unpaid work, the services of consumer durables, research-and-development capital, leisure time, and informal and home education. In most countries, how-

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ever, few efforts were made to broaden the official national accounts until the 1980s. Although many different approaches have been taken, the guiding principle in augmented economic accounts is to measure as much of economic activity as is feasible, regardless of whether it takes place inside or outside the marketplace. Augmented national economic accounts are designed to provide better measures of final output—including what consumers currently enjoy in the way of goods and services, as well as the accumulation of capital, of all kinds, that will permit the future production of goods and services. A set of well-designed augmented accounts can overcome the recognized shortcomings of the current market-based accounts. Environmental accounts can provide information useful for managing the nation's public and private assets, for improving regulatory decisions, and for informing private-sector decisions. Data on comprehensive income and output are a public good that would benefit the nation even though individual firms might not profit from building such accounts. The collection of these data is an investment that would have a high economic return for the nation because better information would allow both the public and private sectors to make better decisions. There are many examples of how comprehensive economic accounts can bring economic benefits. These include better estimates of the impact of regulatory programs on productivity, improved analyses of the costs and benefits of environmental regulations, and more effective management of the nation's public lands and resources. Augmented national accounts would also be valuable as indicators of whether economic activity is sustainable. From the point of view of a national economy, sustainable national income is usefully defined as the maximum amount a nation can consume while ensuring that all future generations can have living standards at least as high as those of the current generation. The NIPA have a close relationship with measures of sustainable income. The usual measure of net domestic product (NDP) corresponds to the highest sustainable level of consumption under certain special conditions. The most important of these conditions are the inclusion of all segments of consumption and net investment—whether market or nonmarket—and the absence of technological change or other dynamic autonomous elements. It is clear that the national productivity depends on many nonmarket elements, including not only the environment, but also such things as schooling, health care, and social capital in volunteer and civic organizations. It may not be possible to capture all these important facets of modern society in the nation's accounts, but an attempt should surely be

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made to include those which are clearly related to economic life, can be measured with sufficient precision, and present a more accurate picture of the nation's economic activity. Integrated Environmental and Economic Satellite Accounts (IEESA) and the Congressional Mandate The U.S. Bureau of Economic Analysis (BEA) has studied augmented accounting since the early 1980s. BEA began work on the U.S. version of environmental accounting, known as Integrated Environmental and Economic Satellite Accounts (IEESA), in 1992. This work was given additional impetus when President Clinton put environmental accounting on a fast track in his 1993 Earth Day speech by stating: "Green GDP measures would incorporate changes in the natural environment into the calculations of national income and wealth." BEA produced its first set of IEESA, along with a proposed framework for further developing the accounts, in 1994 (see Bureau of Economic Analysis, 1994a). A three-phase work plan was proposed. The first phase, with preliminary results presented in the April 1994 Survey of Current Business, involved delineating the overall framework and developing a set of prototype satellite accounts for subsoil assets such as oil, gas, and major nonfuel minerals. The second phase would extend the accounts to renewable and other natural resources such as trees on timberland, fish stocks, and water resources. The third phase would involve nonmarket environmental assets, including the economic value of the degradation of clean air and water and the value of recreational assets such as lakes and national forests. (For a discussion of the work plan and the preliminary results, see Bureau of Economic Analysis 1994a, 1994b.) Congressional concerns about environmental accounting were raised shortly after the initial publication of the draft IEESA. As a result, in the committee report accompanying appropriations for the Department of Commerce in fiscal year 1995, Congress directed that the department suspend further work on the IEESA until the methodological issues involved had been reviewed: The Committee is concerned about the Administration's initiative on "Green GDP" or "Integrated Environmental-Economic Accounting," which seeks to provide a measurement of the contribution of natural resources to the Nation's economy. The Committee recognizes that there may be value to the measurement proposed to be taken under this initiative, but has concerns as to whether the Department has adequately addressed the questions of appropriate methodology and proposed applications of the data in developing this initiative. The Committee ex-

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pects the Department to suspend its work on this initiative until a more thorough analysis of the proposed methodology and applications of Green GDP can be undertaken by an independent entity. (House Report Accompanying HR4603, FY 1995, for the Department of Commerce) Charge to the Panel In response to the above congressional mandate, the Commerce Department asked the National Academy of Sciences to undertake a review of environmental accounting. The Panel on Integrated Environmental and Economic Accounting, working under the aegis of the Committee on National Statistics, was established to perform this review. The Academy's charge to the panel was as follows: A panel is planned to examine the objectivity, methodology, and application of integrated environmental and economic accounting in the context of broadening the national economic accounts. The panel would review the approaches by BEA and others to the valuation of environmental resources, recommend improvements, and suggest further research that would strengthen the knowledge base about valuation. A panel of about 12 members would be convened of specialists in national income accounting, in particular in some areas covered by the augmented accounts, such as private sector accounting, natural resource economists, and relevant environmental scientists. The panel would meet about five times over a two-year period. It would conduct three major reviews: 1.   The panel would review the proposed revisions in general to broaden the national accounts and examine progress made by other national statistical agencies to introduce augmented accounts in the environmental and other areas. The panel would review international efforts on the valuation of environmental resources, particularly in Canada and Western Europe, and review theoretical and empirical work by private agencies and scholars. 2.   The panel would review the first phase of BEA's augmented environmental accounts, which primarily include revisions of the accounts to incorporate reduction of subsoil assets, such as oil and gas. 3.   The panel would review plans and methodology proposed by BEA for its second phase on renewable appropriable resources, such as water and timber, and for its third phase on environmental resources, such as clean air. The panel would compare the methodologies with research in other countries and in nongovernmental research, advise BEA on some of the strengths and weaknesses of different approaches, and recommend improvements and needed research.

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This report details the panel's findings and recommendations. The central issues examined are whether BEA's IEESA are useful for the United States and whether work on the IEESA should resume. Organization of this Report Chapter 2 considers the importance of integrating environmental accounts with the NIPA, and reviews alternative approaches to such accounting. The discussion includes a detailed examination of the theoretical rationale behind extending the NIPA to include all market and nonmarket economic activity. Chapter 3 details the extension of the accounts to subsoil mineral assets, such as fossil fuels and minerals. This was the first area (beyond accounting for pollution abatement capital expenditures) in which BEA addressed environmental matters; it is an area about which Congress has expressed concern; and it provides an excellent introduction to the questions and problems associated with the IEESA. The extension of the IEESA to renewable and other natural resources, as proposed by BEA for its Phase II effort, is covered in Chapter 4. After examining BEA's work in this area, the chapter offers two extended examples—forests and clean air—to illustrate opportunities and problems that arise in developing such accounts. Finally, Chapter 5 presents the panel's overall appraisal of environmental accounting in the United States, as well as the panel's conclusions and recommendations.