Nature's Numbers

Expanding the National Economic Accounts to Include the Environment

William D. Nordhaus and Edward C. Kokkelenberg, Editors

Panel on Integrated Environmental and Economic Accounting

Committee on National Statistics

Commission on Behavioral and Social Sciences and Education

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.



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Nature's Numbers Expanding the National Economic Accounts to Include the Environment William D. Nordhaus and Edward C. Kokkelenberg, Editors Panel on Integrated Environmental and Economic Accounting Committee on National Statistics Commission on Behavioral and Social Sciences and Education National Research Council NATIONAL ACADEMY PRESS Washington, D.C.

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NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, DC 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support of the work of the Committee on National Statistics is provided by a consortium of federal agencies through a grant from the National Science Foundation (Number SBR-9709489). The project that is the subject of this report is supported by the Bureau of Economic Analysis of the U.S. Department of Commerce through Grant No. SBR-9409570 between the National Academy of Sciences and the National Science Foundation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the organizations or agencies that provided support for this project. Library of Congress Cataloging-in-Publication Data Nature's numbers : expanding the U.S. national economic accounts to include the environment / William D. Nordhaus and Edward C. Kokkelenberg, editors. p. cm. "Panel on Integrated Environmental and Economic Accounting, Committee on National Statistics, Commission on Behavioral and Social Sciences and Education, National Research Council." Includes bibliographical references and index. ISBN 0-309-07151-8 1. National income—United States—Accounting. 2. Natural resources—United States—Accounting. 3. Environmental auditing—United States. I. Nordhaus, William D. II. Kokkelenberg, Edward Charles. III. National Research Council (U.S.). Panel on Integrated Environmental and Economic Accounting. HC110.I5 N43 1999 339.373—dc21 99-6236 Additional copies of this report are available from National Academy Press, 2101 Constitution Avenue, N.W., Washington, D.C. 20418 Call (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area) This report is also available on line at http://www.nap.edu Printed in the United States of America Copyright 1999 by the National Academy of Sciences. All rights reserved.

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Panel on Integrated Environmental and Economic Accounting WILLIAM D. NORDHAUS (Chair), Department of Economics, Yale University CLARK S. BINKLEY, Hancock Timber Resource Group, Boston, Massachusetts ROBERT EISNER, Department of Economics, Northwestern University DALE W. JORGENSON, Department of Economics, Harvard University BRIAN NEWSON, Eurostat, Luxembourg HENRY M. PESKIN, Edgevale Associates, Nellysford, Virginia JOHN M. REILLY, Joint Program on Science and Policy on Global Change, Massachusetts Institute of Technology ROBERT C. REPETTO, Graduate School of Public Affairs, University of Colorado, Denver BRIAN SKINNER, Department of Geology and Geophysics, Yale University JOHN E. TILTON, Division of Economics and Business, Colorado School of Mines VICTORIA J. TSCHINKEL, Landers and Parsons, Tallahassee, Florida MARTIN L. WEITZMAN, Department of Economics, Harvard University EDWARD C. KOKKELENBERG, Study Director GRAHAM DAVIS, Consultant PETER FEATHER, Consultant DANIEL HELLERSTEIN, Consultant JIM HRUBOVCAK, Consultant ANU DAS, Research Assistant JOSHUA S. DICK, Senior Project Assistant

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Committee on National Statistics 1998-1999 JOHN E. ROLPH (Chair), Marshall School of Business, University of Southern California JOSEPH G. ALTONJI, Institute for Research on Poverty and Department of Economics, Northwestern University JULIE DAVANZO, RAND, Santa Monica, California WILLIAM F. EDDY, Department of Statistics, Carnegie Mellon University WILLIAM KALSBEEK, Department of Biostatistics, University of North Carolina RODERICK J.A. LITTLE, School of Public Health, University of Michigan THOMAS A. LOUIS, Division of Biostatistics, University of Minnesota CHARLES F. MANSKI, Department of Economics, Northwestern University WILLIAM D. NORDHAUS, Department of Economics, Yale University JANET L. NORWOOD, The Urban Institute, Washington, DC EDWARD B. PERRIN, Department of Health Services, University of Washington PAUL R. ROSENBAUM, Department of Statistics, The Wharton School, University of Pennsylvania FRANCISCO J. SAMANIEGO, Division of Statistics, University of California, Davis RICHARD L. SCHMALENSEE, Sloan School of Management, Massachusetts Institute of Technology MIRON L. STRAF, Director (on leave) ANDREW A. WHITE, Acting Director

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Acknowledgments The Panel on Integrated Environmental and Economic Accounting wishes to thank the many people who contributed to its work. The project was sponsored by the Bureau of Economic Analysis of the U.S. Department of Commerce. At the beginning of our work, and throughout the deliberations, the panel was helped by the director of the bureau, J. Steven Landefeld, as well as its staff, who provided background on their work on the U.S. Integrated Environmental and Economic Satellite Accounts and discussed the issues involved in developing the accounts. We particularly thank Gerald F. Donahoe, Bruce T. Grimm, Arnold J. Katz, Stephanie H. McCulla, Robert P. Parker, and Timothy Slaper for their help in explaining the complexities of environmental accounting. The panel's work also benefited from the contributions of Graham Davis of the Colorado School of Mines, who helped us incorporate the economics of subsoil assets, and James Hrubovcak of the U.S. Department of Agriculture (USDA), who was helpful in sharpening our understanding of water and air issues. In addition, the panel benefited from the participation of Peter Feather and Daniel Hellerstein, both of the USDA, in our discussions of nonmarket valuation. We are also grateful for the perspectives of several experts who made major presentations to, or held discussions with, the panel, including Gerald Gravel of Statistics Canada, Kirk Hamilton of the World Bank, John Hartwick of Queens University in Ontario, Peter Bartelmus of the United Nations, Richard Haines of the U.S. Forest Service, and Craig Schiffries of the National Research Council. We also note that the many members of the London Group of na-

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tional income accountants, who are concerned with integrated environmental and economic accounting, allowed us to attend their annual meetings and shared many documents with us, thus giving the panel a broader perspective concerning the problems we considered. We are particularly thankful for insights provided by Ann Harrison of the Organization for Economic Cooperation and Development and Henry Neuburger of Her Majesty's Government, United Kingdom. This report, the collective product of the entire panel, reflects the dedication and commitment of its individual members. All of the panel members participated in many meetings and discussions and in reviewing drafts and contributing sections to the final report. In addition, John Tilton led a subpanel on minerals and John Reilly and Henry Peskin led a subpanel on renewable and environmental resources. Clark Binkley was particularly helpful in developing the sections of the report on forestry, and Martin Weitzman was instrumental in developing the material on sustainability. The panel was extraordinarily lucky to have the assistance of Edward Kokkelenberg, the study director, who had responsibility for organizing and coordinating panel and subpanel meetings, gathering much of the written material, attending the London Group conference, arranging for consultants, and preparing the report. Without his skills and dedication, the report could not have been produced in the time available. The panel was established under the auspices of the Committee on National Statistics. Miron Straf, director of the committee, was instrumental in developing the study and providing guidance and support to the panel and staff. The committee, under the chair first of Norman Bradburn and later of John Rolph, had the responsibility for establishing the panel and monitoring its progress. Deputy director Andrew White helped us in the final stages to develop sharp recommendations and navigate the requirements of the National Research Council. Other members of the staff included Joshua Dick, Cassandra Shedd, Jennifer Thompson, and Anu Das; they provided excellent administrative, editorial, and research support for the study and the report. We also thank Rona Briere, who helped us improve the report through technical editing. To all we are most grateful. Our report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Research Council's Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the

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study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their participation in the review of this report: Theodore W. Anderson, Department of Statistics, Stanford University (emeritus); Kenneth J. Arrow, Department of Economics, Stanford University; Peter Bartelmus, Statistics Division, United Nations; James R. Craig, Geologic Sciences, Virginia Polytechnic Institute and State University; Martin H. David, Department of Economics, University of Wisconsin; Michael R. Dove, School of Forestry and Environmental Studies, Yale University; Theodore R. Eck, AMOCO, Chicago, IL; Charles Hulten, Department of Economics, University of Maryland; Daniel M. Kammen, Woodrow Wilson School of Public and International Affairs, Princeton University; Arthur H. Lachenbruch, U.S. Geologic Survey, Menlo Park, CA; Thomas A. Louis, School of Public Health, University of Minnesota; Donald Ludwig, University of British Columbia (emeritus); Thomas C. Schelling, School of Public Affairs, University of Maryland; Burton H. Singer, Office of Population Research, Princeton University; and Robert M. Solow, Department of Economics, Massachusetts Institute of Technology. Although the individuals listed above have provided constructive comments and suggestions, it must be emphasized that responsibility for the final content of this report rests entirely with the panel and the National Research Council. This report and its many antecedents over the last two decades owe their existence, high quality, and purpose to the pioneering work of the late Robert Eisner of Northwestern University. Professor Eisner was a member of the panel and gave us his wisdom and guidance throughout our deliberations. Bob Eisner died in November 1998 after the report was completed. I speak for the panel in saluting his many contributions; we will miss him. WILLIAM D. NORDHAUS, CHAIR PANEL ON INTEGRATED ENVIRONMENTAL AND ECONOMIC ACCOUNTING

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. William A. Wulf are chairman and vice chairman, respectively, of the National Research Council.

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Contents Executive Summary   1 1 Introduction   11 2 The National Income and Product Accounts: History and Application to the Environment   19 3 Accounting for Subsoil Mineral Resources   59 4 Accounting for Renewable and Environmental Resources   106 5 Overall Appraisal of Environmental Accounting in the United States   153 Appendices     A   Sustainability and Economic Accounting   183 B   Sources of Physical and Valuation Data on Natural Resources and the Environment   196 C   Accounting for Forest Assets   202 D   Glossary   207 E   Biographical Sketches   224 References   230 Index   239

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