Nature's Numbers Expanding the National Economic Accounts to Include the Environment (1999) / Chapter Skim
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2 The National Income and Product Accounts: History and Application to the Environment
2 The National Income and Product Accounts: History and Application to the Environment
Pages 19-58
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From page 19... ...
national accounts is straightforward. Natural resources such as petroleum, minerals, clean water, and fertile soils are assets of the economy in much the same way as are computers, homes, and trucks.
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From page 20... ...
HISTORY OF AUGMENTED ACCOUNTING General Developments From the perspective of environmental accounting, the key point to recognize is that gross domestic product (GDP) is conceptually defined to include only the final output of marketed goods and services, that is, goods and services that are bought and sold in market transactions.
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From page 21... ...
The objective of augmented accounting is not to replace the core accounts with a preferred new bottom line; rather, the emphasis is on developing alternative approaches and measures that can illuminate the diverse dimensions of economic activity. Work on augmented accounting by official statistical agencies, as well as by individual scholars, has provided estimates for a wide variety of nonmarket activities for experimental augmented national accounts (see Eisner, 1988, for a comprehensive review of augmented accounting)
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From page 22... ...
Development of a complete set of capital accounts would thus give the nation a much more complete picture of how well the current generation is performing in its role as trustees of the nation's tangible, human, and natural resources. Comprehensive accounts and environmental accounting provide information that can help governments set sound economic and social policies and aid the private sector in making productive investments.
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From page 23... ...
These thorny questions are taken up later in this report, but we note here that they are pervasive in the design of augmented accounts. The second major issue is how to measure nonmarket activities.
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From page 24... ...
Market-based concepts are inadequate, however, for tracking the entire range of economic activity, market and nonmarket. The purposes of augmented accounting are to provide more comprehensive measures of output, saving, and investment; to ensure that the accounts treat economic activity in a consistent way when the boundaries between market and nonmarket activities change; and to provide information on the interaction between the economy and the environment so that natural and environmental resources can be more effectively managed and regulated.
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From page 25... ...
For similar reasons, when fishing activities increase the harvest of cod or halibut, the national accounts record the increased production and consumption, but omit the decline in breeding stocks and the costs imposed on future producers and consumers. And pollution abatement expenditures increase measured output even when such expenditures serve only to offset environmental deterioration, and there is no net increase in current or future consumption.
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From page 26... ...
The third and perhaps most important deficiency of the conventional national accounts is that they give a very incomplete picture of the full scope of economic activity. By focusing only on marketed outputs and factors of production, the conventional accounts neglect a large number of economically significant inputs and outputs that are not bought and sold in markets.
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From page 27... ...
Value of a Comprehensive Set of Accounts: Scorekeeping and Management Economic accounting whether it be business accounting or the accounting of a nation's economic activity traditionally serves two major functions: it offers a way to track the economic performance of a business or a nation, and it provides an organized body of economic data that enhances the ability of an organization or a nation to manage its economic affairs. The principal reason for growing interest in natural-resource and environmental accounting is the belief that improved accounting for the contribution of natural capital will enhance the ability of the conventional accounts to serve both of these functions.
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From page 28... ...
One valuable contribution of well-designed comprehensive measures is that they can eliminate anomalies in the national accounts. For example, according to conventional measures of economic performance, oil spills and earthquakes often raise GDP and appear to make the nation better off.
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States and localities similarly require comprehensive accounts of economic activity. Such comprehensive accounts need to include natural-resource and environmental accounting.
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Limiting the national accounts to market sectors can produce misleading information on overall economic trends. One important example is standard measures of national saving and investment, which include only investment in tangible capital such as factories, equipment, inventories, and houses.
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From page 31... ...
Preliminary work on augmented accounting exclusive of the environment indicates that broadening the accounts to include comprehensive consumption and investment could easily double the reported net income and output and might increase reported net investment by a large factor.3 Similarly, as discussed in Chapter 4, corrections for environmental flows, particularly those involving nonmarket impacts on the health and safety of the population, could have major impacts on measured income. Comprehensive Accounts Provide Much Useful Information for Public Policy and Private Decision Making Environmental accounts would provide useful information for managing the nation's assets and for improving regulatory decisions.
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From page 32... ...
Better information on physical emission trends, human exposures, and the economic impacts and damages from air and water pollution would be valuable for expanded accounting measures of productivity. Hence, both the underlying information and the aggregate dollar values in environmental accounts would provide essential information for ensuring that our environmental regulations pass an appropriate cost-benefit test.
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From page 33... ...
One of the leading explanations for this decline was that increased health and safety regulations were imposing significant economic burdens on the nation's businesses. Preliminary versions of natural-resource and environmental accounts particularly the estimates of pollution control and abatement expenditures prepared by BEA were of great value for estimating the impact of regulation and pollution-control expenditures on productivity.
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From page 34... ...
The nation would save $20 billion annually if a comprehensive set of measures and accounts verified this level of sequestration, if this sequestration could be used to offset industrial emission reductions, and if those industrial emission reductions cost $100 per ton of carbon. This is one of the most dramatic examples of the benefits of establishing comprehensive nonmarket physical and economic accounts.
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From page 35... ...
For example, it is estimated that reducing uncertainties about the costs and damages of climate change by half over the next two decades would be worth more than $20 billion.5 Clearly, as the United States and other countries grapple with the conflict between their international commitments and the domestic costs of emission reductions, improved information on the economic costs and benefits involved could greatly benefit the analysis. Link Between National Income Accounting and Measures of Sustainable Income In light of increasing environmental problems in many sectors, concerns have been raised about the sustainability of current patterns of economic activity in both developed and developing countries.
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From page 36... ...
More precisely, when population is constant, when the national accounts include all stocks of capital and other dynamic features that affect production, and when markets accurately capture the entire social value of economic activity, NDP is an appropriate measure of sustainable income. In other words, the sum of total consumption and net capital formation is equivalent to the maximum sustainable amount of per capita consumption an economy can maintain indefinitely.
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From page 37... ...
Even though the conditions under which the correspondence principle applies are quite stringent, the basic insight is of great value for the designing of environmental accounts. ALTERNATIVE APPROACHES TO ENVIRONMENTAL ACCOUNTING General Issues in Environmental Accounting Over the last quarter-century, official statistical agencies and individual researchers have responded to the deficiencies in current accounting approaches by developing alternative approaches and novel systems of accounts.
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From page 38... ...
While private scholars might be willing to use back-of-the-envelope, or even seat-of-the pants, approaches, official statistical agencies are more reluctant to compromise their reputations with controversial and unproven methodologies. The following subsections review approaches that emphasize physical accounting, the development of comprehensive economic accounts that include nonmarket activity and environmental services, and proposed approaches to environmental accounting developed by the United Nations.
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From page 39... ...
From the policy maker's point of view, the answer will depend on policy objectives: commercial timber management, firewood supply, recreational uses, erosion protection, species diversity, and so on. Additionally, when environmental assets have multiple uses, as in the case of forests, the units of the indicators are different (acres, cubic feet, number of species, cords of firewood, and miles of streams)
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From page 40... ...
When the physical systems are highly complex and heterogeneous and are less closely linked to policy objectives, physical accounting is less useful for policy or accounting purposes. It is essential to emphasize, however, that detailed physical information remains an essential component of both economic accounts and environmental policy making.
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From page 41... ...
From the point of view of environmental accounting, enhancing the accounts in a manner that is scientifically and economically sound will require considerable improvement in the underlying physical data. Development of Comprehensive Economic Accounts Comprehensive Measures of Income and Output One approach to developing comprehensive economic accounts, and the one with the longest history, is the construction of comprehensive measures of national income or output to supplement the conventional national economic accounts.
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From page 42... ...
Targeted Approaches to Environmental Accounting Comprehensive approaches are useful supplements to the conventional national accounts in that they can sketch the evolution of broad measures of economic activity. However, because most of the comprehensive approaches to measuring national output and income treat natural-resource and environmental measures in a broad-brush fashion, they do not provide many of the important details about particular sectors, environmental activities and assets, and interactions between the environment and the economy.
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From page 43... ...
The principal thrust of this effort is to modify the conventional net national income and output by deducting estimates of the value of the depletion of natural resources such as forests, mineral stocks, fish stocks, and soils. The rationale for this modification is to ensure that reproducible capital and natural capital receive comparable treatment in the computation of net investment, net output, and national income.
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From page 44... ...
Two decades of work on environmental accounting has shown, however, that there are significant obstacles to the construction of accurate estimates of augmented national income and output. For practical accountants, the most daunting obstacles are empirical and data problems involved in estimating quantities of stocks and flows and providing monetary valuation; these problems were discussed briefly above.
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From page 45... ...
One early suggestion for improving the conventional economic accounts, especially with respect to their neglect of environmental deterioration, was to treat all pollution abatement expenditures as "intermediate" expenditures in the national accounts. As a consequence, pollution abatement investments, governmental municipal sewage treatment expenditures, and defensive consumer outlays for pollution control would not be counted in GDP.
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From page 46... ...
How large might this overestimate be? One study has shown that about 20 percent of reported pollution abatement expenditures in the United States did not originate in federal regulatory policy.
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Extensions of the U.N. System of National Accounts: System of Integrated Environmental and Economic Accounting A great deal of work outside the United States has been devoted to developing physical and monetary accounts for natural resources and the environment (see for example Uno and Bartelmus, 1998~.
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From page 48... ...
The basic framework envisions adding environmental flows in a series of steps or versions. Version I of the SEEA reorganizes the traditional national accounts to highlight environmental and natural-resource flows.
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of any change in the services of these environmental assets and of the change in the stocks of these assets. As is discussed in Chapter 3, for example, the appropriate valuation of depletion of petroleum stocks is the change in the market value of oil in the ground.
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Discoveries would increase the value of the stock, while depletion would decrease its value. Environmental Accounting in Other Countries As noted earlier, environmental and natural-resource accounting has been extensively developed in countries outside the United States over the last quarter-century.
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As noted earlier, other countries have adopted BEA's approach of keeping their environmental and natural-resource accounts in satellite or supplemental accounts; the core national accounts have not been modified to reflect environmental and natural-resource changes. This approach has been endorsed by the European Commission (European Union, 1994:5~: The development of a "greened" GNP, although having a certain appeal .
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From page 52... ...
, and soils. Some of the environmental accounts are quite close to the existing national accounts; this is particularly the case for the mineral accounts, which are conceptually included in existing national wealth accounts.
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From page 53... ...
Rather than making major conceptual changes to the national accounts, BEA recommended that a separate series on pollution abatement expenditures be developed to interpret movements in national output, rather than to change the definition of national output itself. Work began on the development of such a survey in 1971, and preliminary results were published
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From page 54... ...
In particular, BEA added a number of questions on pollution abatement to the November 1973 Plant and Equipment Survey of companies, and in 1974 the Census Bureau began surveying about 19,000 manufacturing establishments with regard to their pollution abatement expenditures. In response to the success of BEA's efforts to develop pollution abatement expenditure data, Congress approved funds that allowed for expansion of BEA's environmental program.
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From page 55... ...
· Phase III, Environmental Assets The third phase "calls for moving on to issues associated with a broader range of environmental assets, including the economic value of the degradation of clear air and water or the value of recreational assets such as lakes and national forests" (Bureau of Economic Analysis, 1994a:49~. Since publishing its first report in 1994 in the two above-mentioned articles, BEA has ceased further work on environmental accounting in response to the congressional stop-work order.
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From page 56... ...
While recognizing the need to consider alternative measures, it is important to retain the core market-based accounts, which are of great value for historical and international comparisons and will continue to be a critical indicator for much economic policy making. Work on augmented accounting in official statistical agencies, as well as by individual scholars, has yielded estimates on a wide variety of nonmarket activities for experimental augmented national accounts.
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From page 57... ...
From the point of view of environmental accounting, enhancing the national accounts in a manner that is scientifically and economically sound will require considerable improvement in the underlying physical data. A second approach to environmental accounting is the construction of comprehensive measures of national income or output to supplement the conventional GDP and NDP accounts.
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From page 58... ...
As envisioned by BEA, the work plan would have three phases: Phase I, which involved establishing the overall framework and developing prototype satellite accounts for subsoil assets such as petroleum, gas, and nonfuel minerals; Phase II, which would extend the accounts to renewable natural-resource assets, such as trees on timberland, fish stocks, and water resources; and Phase III, which would extend the effort to issues associated with a broader range of environmental assets, including the economic value of the degradation of clear air and water and the value of recreational assets such as lakes and national forests.
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