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6 Environmental Accounting: A Framework for Assessment and Policy Integration

Ved Gandhi
Published Date:
June 1996
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Peter Bartelmus

The compartmentalization of human activities and a corresponding neglect of ecological and socioeconomic interdependence have been blamed for policy failures in both environment and development (WCED, 1987). There can be hardly any doubt about the existence of interdependence between issues and policies of population, poverty, environment, and economic performance and growth. The Brundtland Commission (WCED, 1987) and the discussions and publications in the wake of the Earth Summit (UNEP, 1992; Bartelmus, 1994a; Brown and others, annual) give ample evidence of these interrelations as well as cross-boundary impacts of regional activities. The papers by Hansen and Gandhi and McMorran in this volume elaborate on the effects of macroeconomic and mesoeconomic policies on the environment. The reverse, how the environment affects the economy through the erosion of natural capital and its impact on human capital, is described in the Pearce and Hamilton paper.

An Issue of Integration

The obvious answer is integration in assessing interdependence and in policy formulation and evaluation. Reorienting planning and policy toward integrated sustainable development has therefore been the leitmotif of the Earth Summit, the 1992 United Nations Conference on Environment and Development (United Nations, 1993c), and follow-up sessions of the United Nations Commission on Sustainable Development.

Many countries continue to address environmental issues from the periphery of weak environmental protection agencies that are generally unable to incorporate environmental concerns into mainstream economic and fiscal policies. Proclamations on the need for sustainable development by governments and international organizations also can be deceptive—frequently they turn out to be mere rhetoric, a coverup for piecemeal and sporadic environmental action. Of course, such eclectic measures are a far cry from the full incorporation of environmental objectives into all stages and levels of decision-making.

What are the reasons? For one, recurrent exhortations by environmentalists fail to impress policymakers. Hard budgetary decisions for dealing with environmental effects of economic activities require hard evidence of the trade-offs between the two. This is a matter of compiling data and indicators not so much on the existence of interdependence, but on its comparative strength. In other words, indicators are needed that permit a comprehensive quantitative comparison of effects across disciplines and regional boundaries.

Another reason for inaction on or denial of interdependence is the inability of both decision-makers and data producers to translate the widely acclaimed paradigm of sustainable development into concrete policy advice, probably because of the absence of a generally accepted definition of such development. How can we expect to address perceived nonsustainability of human activity if we are not clear or disagree on what it is? In this sense, the murky notion of sustainability seems more of an impediment to policy integration than a framework for action. Operational (quantifiable) concepts of sustainable growth and development are needed.

The popular definition of sustainable development by the World Commission on Environment and Development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987, p. 43) is vague. It does not specify the time horizon of future generations, gives no indication of the role of the environment, and refers to the opaque concept of human needs.1

More operational concepts can be derived by examining the sustainability of providing economic goods and noneconomic amenities by the economy, nature, and the social system.2 Accordingly, economic, environmental, and social sustainability of supply and production can be distinguished. Following the supply process through to the final uses and users permits a further distinction between the sustainability of supply and production and the sustainability of uses and users. This categorization links the concept of sustainability to well-defined economic production and consumption processes and to less well-defined qualities of life of human users of goods, services, and amenities.

Sustainable Supply

A significant part of the economic sustainability of production and income is already addressed in national accounts by making an allowance for the consumption of capital in production processes. Recently acknowledged scarcities of further inputs of natural resources and environmental services, notably of waste absorption, call for the extension of the sustainability criterion from produced capital maintenance to the maintenance of natural capital. In addition, the maintenance of human capital (skills and knowledge) and of institutional capital (the social, legal, and organizational infrastructure) for economic activities would also have to be considered in a comprehensive discussion of sustainable economic growth. Because of conceptual difficulties in measuring human and institutional capital, proposals for integrated environmental and economic accounting (United Nations, 1993b) have concentrated on produced and natural capital consumption.

The step from economic production to the supply of noneconomic, but welfare-relevant, amenities, and thus from economic growth to development, can be made by introducing two further sources of human welfare—nature and the social system.

Natural systems provide water, oxygen, nutrient flows, waste assimilation, and recreation. As long as these goods are not scarce, they do not affect the sustainability of economic consumption: they have, by definition, a zero economic value. Other value systems might give an “existence value” to ecological, aesthetic, or ethical attributes of natural systems. Changes in their stability or quality affect the noneconomic ecological sustainability of the supply of environmental services.

Social systems include public efforts to meet objectives of equity, freedom, health, security, and education. Some of the goods and services related to these objectives are supplied by market producers. Others, being collective goods and services, are typically provided by the government. They include law and order, public health, and environmental protection. For the supply of market-produced goods and services, the above-discussed criteria of economic sustainability apply. For collective goods and services, the social sustainability of their supply would have to be defined in terms of maintaining the government’s institutional and fiscal capability for providing them.

Sustainable Use

A distinction can be made between final uses and the ultimate users of goods and amenities. Such analysis is more welfare- and people-oriented than the above description of cost- and technology-oriented production and supply.

Because national disposable income represents potential claims on final uses, it is a better measure of economic welfare than GDP. The incorporation into national income of the value of environmental services to consumers and of further welfare effects from the degradation of the environment thus facilitates a broader assessment of human welfare. The policy focus on market-based measures of economic growth has been criticized, however, by advocates of multidimensional development. Such development would have to address a variety of social concerns or human needs and aspirations. Much of the discussion of the human quality of life and corresponding social indicators has therefore focused on the inadequacy of development that concentrates on economic growth (OECD, 1973).

Indicators of final consumption and human needs focus already to some extent on the people who strive to meet those needs. Indeed, the ultimate objective of sustainability is not to sustain human activity but human beings themselves. Although the sustainability of income and consumption is easier to measure, it should be considered as a proxy only for the sustainability of human well-being. Attempts have been made, therefore, at concentrating more on the human factor in development by measuring the level of economic aggregates in per capita terms, defining an overall human development index (UNDP, 1991) and determining the carrying capacity of land for human populations (FAO, UNFPA, and IIASA, 1982; Vitousek and others, 1986).

The above discussion of sustainability concepts refers to various possibilities of merging environmental and socioeconomic concerns through operational indicators. Accounting for both economic activities and their environmental effects is probably the most significant step toward such integration. Accounting indicators have generally been used as the main operational variables to analyze economic performance and growth. Environmentally adjusted accounting aggregates can therefore be used in defining, measuring, and analyzing sustainable and environmentally sound economic performance and growth. Such analysis would have to consider substitution of capital in production, technological progress, and changes in consumption patterns (see below).

This paper explores the capabilities of integrated environmental-economic accounting for assessing the interaction between environment and economy. The limits of this accounting in measuring welfare effects and noneconomic development will also be discussed. Those goals are probably better assessed by other instruments of data collection and analysis.

Stress-Response Approach

The discussion of interdependence and sustainability above depicts widespread repercussions of human activity on the environment. To formulate and monitor integrated policies, social responses need to be related to the effects of human activities. The sequence of activity-impact/effect-response has therefore been used as the organizing principle for environmental and related social, demographic, and economic statistics in the United Nations (1984) Framework for the Development of Environment Statistics (FDES). The same principle has been taken up again in developing stress-response and other Frameworks for Indicators of Sustainable Development (FISD) (Bartelmus, 1994c).

All these frameworks present physical data in matrices that do not attempt to show functional relationships among statistical variables. Rather, they represent juxtapositions of such variables, leaving functional connections and the further integration of data to separate analysis. Unfortunately, models abound in the environmental and economic fields, and international consensus remains an elusive goal. However, one data system, the 1993 System of National Accounts (SNA), has been adopted worldwide to measure economic activity. The system presents accounting identities and uses a common numéraire, the market price, for integrating diverse activities through aggregation.

Given the interest in assessing the environmental sustainability of economic performance and growth, the UN Statistics Division (UNSD) explored possibilities of introducing environmental effects into the SNA. The idea was to incorporate environmental costs (and benefits where applicable), not into the SNA core system itself, but into a satellite System of integrated Environmental and Economic Accounts (SEEA) (United Nations, 1993b). Figure 1 illustrates how this incorporation is achieved by extending the asset boundary from conventional (produced) economic assets to include environmental assets and their depletion and degradation (shaded areas). In monetary terms, most of these changes represent environmental costs generated by economic agents.

Figure 1.SEEA: Flow and Stock Accounts with Environmental Assets

The SEEA presents different modules for describing interrelations between the economy and environment according to alternative valuation principles. The different valuations can be categorized as the measurement of the environmental costs caused directly by economic activities, the (damage) costs borne ultimately by individuals, and the actual costs incurred in environmental protection. This distinction allows linking the above-mentioned stress-response sequence of integrated statistical frameworks to the different approaches proposed in SEEA. The following discussion of these cost categories will examine to what extent economy-environment-policy interrelationships can be measured in an integrated accounting framework.

Cost-Caused Accounting

Two categories of valuation are proposed in the SEEA for costing the direct impacts (stress) of economic (production and consumption) activities on the availability of natural resources and environmental services, such as the safe absorption of waste and residuals. The two categories refer to market values revealed in the sale of natural resources and the maintenance costs of the environment that would have avoided environmental impacts generated during the accounting period.

Market Valuation

Market values can be applied to the depletion of natural resource capital, caused mainly by extracting scarce raw materials from nature.3 In the past, conventional accounts considered natural resources to be in unlimited supply, giving them a zero economic value. Their loss for future use in production was thus overlooked, undermining the long-term sustainability of production and economic growth.

Even from a purely economic point of view, some allowance for this type of natural capital consumption should be made at both the micro-economic (corporate) level and the macroeconomic and mesoeconomic levels; such an allowance would ensure that enough saving and investment would be generated for continuing production. Congo (Brazzaville) is an example of a country where oil riches have been siphoned off by a foreign company without any effect on the living standards of the population (New York Times, June 18, 1995, “Sleepy Congo, a Poor Land Once Very Rich”). It can be assumed that the company has kept good records of the depletion, while no such accounting seems to have been done for the nation.

The revised (1993) SNA records the depletion and degradation of economic natural resources in its asset accounts as economic disappearance.4 However depletion and degradation (and discoveries) of natural resources are included under other volume changes, that is, outside the production accounts. As a consequence, they are not costed in the production accounts of the SNA and do not affect value added and national income and product. The SEEA, on the other hand, shifts the value of depletion and degradation of economic resources from other volume changes to production (as environmental costs) and to capital formation (as a decrease in natural capital).

Maintenance Costing

A major drawback of market valuation is its restriction to the scope and coverage of economic assets. The impact of economic activities on environmental assets, such as forests, and on the quality of air, water, and land is not accounted for. It can be argued that the use of scarce environmental services represents a factor input of the environment into production. Such an input represents economic cost, beyond what is implied by the narrow SNA definition of “economic” assets. Maintenance costing is therefore proposed to capture the impact on all natural assets irrespective of their economic or environmental functions. Maintenance costs are defined in the SEEA as the costs that would have been incurred if the environment had been used during the accounting period in such a way that its future use had not been affected. These costs are, of course, hypothetical because actual depletion and degradation do affect future uses of the environment.

The maintenance cost concept reflects a conservationist view of the environment. Uncertainties about long-term hazards from disturbing the natural environment and possible irreversibility of environmental impact from economic activities call for a high degree of risk aversion and the maintenance of at least the present level of environmental quality. Also, the use of maintenance costs for valuing environmental functions is similar to valuing the services of man-made capital: allowances made for capital consumption in national accounts can be taken as the amount necessary to keep capital intact.

In the case of nonrenewable subsoil resources, the application of a strong sustainability (full conservation of the resource) concept would lead to the non-use of certain resources and indeed squandering of other resources whose extraction involves limited environmental impact. A weaker sustainability concept would allow for substituting sub-soil assets by other natural or man-made assets with a view to maintaining income levels rather than particular categories of natural capital. The market or user-cost valuation, noted above, caters to this approach.

Cost Internalization and Integration

Accounting in this manner for the environmental costs caused by natural resource depletion and pollution reflects the widely accepted philosophy of the user/polluter-pays-principle (OECD, 1989). Cost-caused accounting thus helps to assess the sources of environmental depletion and degradation with a view to prompting economic agents—through appropriate (dis)incentives—to internalize these costs into their accounts and budgets. It has been argued, however, that hypothetical costing of environmental impacts cannot be compared with observed, that is, realized, benefits in the market (de Haan and Keuning, 1995). A counter-argument is that maintenance costs reflect a pragmatic first-step assessment of externalities that should be internalized by causing agents. In this sense it provides necessary information for setting the level of “economic instruments” for cost internalization.5

From a macroeconomic point of view, maintenance costs serve as weights needed to aggregate different environmental impacts occurring during the accounting period. Any aggregate comparison of environmental and economic effects has to resort to some type of weighing, reflecting their relative importance. Alternatively, one would have to content oneself with either juxtaposing partially aggregated physical indicators and monetary indicators, or to resort to shadow pricing in models that usually represent only a shadow of reality. Monetary weighing by means of prices or unit costs permits full integration of environmental impacts and effects with economic costs and benefits. The SEEA therefore proposes to deduct environmental costs from the economic benefits generated in production, obtaining environmentally adjusted value added and, as its sum total, an Environmentally adjusted net Domestic Product (EDP).

Cost-Borne Accounting

Optimal levels of environmental externalities are reached when marginal costs of abatement equal marginal damage reduced. As a consequence, cost internalization instruments should be set at this level where environmental cost reflects the environmental damage borne by economic agents (households and enterprises). One issue is how to determine individual marginal cost and damage curves and aggregate them at the sectoral or national levels. Another issue, discussed below, is to what extent optimality criteria apply in the absence of perfect competition and transparency in real-world markets.

The measurement of environmental damage is addressed in a separate version of the SEEA by means of cost-borne valuation. This valuation combines the market valuation of natural resource depletion, mainly borne by enterprises, with contingent or similar valuations of the welfare effects from environmental deterioration borne by households. Well-known problems of applying contingent and related valuations in cost-benefit analyses at the project level6 accumulate at the national level. At least for the time being, such valuation does not seem to be applicable in routine national accounting, but could be further explored in more experimental studies for selected environmental subjects or (subnational) regions.

It is also doubtful whether contingent valuations are at all suitable for incorporation into national accounts. National accounts are based on market prices that are not capable of assessing welfare owing to their exclusion of consumer surpluses. Contingent valuations on the other hand include these surpluses when assessing the willingness to pay for environmental services. Mixing these valuations would create aggregates that being neither performance nor welfare measures are difficult to interpret.

It appears that national accounts can contribute little to the assessment of environmental damage generated and borne by the different economic units. Closest to assessing environmental and social costs within the national accounts framework is probably the above-described maintenance costing. Such costing represents a least-cost approach, based on available technologies and desirable standards. To the extent that these standards, typically set by enlightened governmental institutions, approximate the optimal damage reduction level, minimum compliance cost would be consistent with optimal cost internalization into a perfectly competitive market price system. In reality, of course, compliance and maintenance cost do not equal optimal damage values. Under these circumstances, maintenance costing can be considered as a pragmatic combination of technological solutions to environmental problems and social preferences for environmental conservation.

Cost-Incurred Accounting

Responses to environmental impacts can be proactive, reactive, regulatory, or incentive. A classification of those responses that incur actual expenses is incorporated in a separate module of the SEEA dealing with the segregation of environmental protection expenditures. Since these expenditures are already part of conventional accounts they are fully consistent with the market valuation of the SNA, but they may pose difficult measurement and classification problems, notably in the case of inputs and outputs that can serve both environmental and other (economic) purposes.

The analysis of current (intermediate and final consumption, labor cost) and capital expenditures in national accounts could be usefully extended to the sources of expenditures, as measured in financial accounts. Financial accounts are an integral part of national accounts and can thus be directly linked to nonfinancial transactions in the economy. This link facilitates the integrated analysis of environment-economy interaction in debt, savings, inflation, fiscal policy, and income distribution. However, little work has been done on the financial aspects of environmental accounting, owing to its focus on the physical environment and its role in sustaining growth and development.

In line with the focus of the SEEA on environmental stress caused by economic activities, its Classification of Environmental Protection Activities (CEPA) reflects responses to environmental degradation only. In principle, classifications of expenditures made to mitigate or avoid environmental welfare effects borne by human beings, in particular health-related expenses, could also be introduced into the SEEA. Several scholars propose the deduction of both types of expenditures from national income. In their view, they represent “defensive” expenditures, which compensate only for negative environmental effects of economic growth and urbanization (Leipert, 1989; Daly, 1989; Pearce, Markandya, and, Barbier, 1989). However, this deduction is questionable since it would draw the transaction-based accounting approach into the murky waters of welfare measurement. Necessarily, the exclusion of defensive or any other undesirable activity from the economy would change the production boundary quite arbitrarily, since it is hardly possible to obtain a consensus on what is desirable or regrettable in society.

The separate identification of total (current and capital) expenses for environmental protection seems to provide a comprehensive picture of the efforts undertaken by different sectors and institutions to protect the environment. However, this aggregate is not directly comparable to the net productive effort of the economy, reflected in GDP. The value of total expenditure includes double counting of the cost of intermediate uses contained in the value of final ones (capital and consumption).

Two alternative approaches suggest themselves. One is to create a new (broader) environmental service sector, combining internal (ancillary) and external environmental activities. In this sector, internal environmental services that are not transacted between establishments (production units) of enterprises would be externalized, increasing gross output, but leaving value added and GDP unchanged. Alternatively, input-output analysis could be used to assess the direct and indirect value-added contributions to net domestic product (NDP) in connection with environmental protection expenses (Schäfer and Stahmer, 1989). This approach would assess the total involvement of the economy in environmental protection as far as production and income generation are concerned.

Environmentally Adjusted Indicators

The above stress-response analysis of monetary valuation showed how environment-economy interactions can be assessed within an integrated accounting framework. The following takes the next step by describing how environmental values can be incorporated into the aggregation process provided by integrated accounts. This process can be seen as the highest form of integration, merging environmental and economic issues in a few macroeconomic indicators. While it is impossible to describe here all the potential applications of environmentally modified aggregates, some immediate uses in policy formulation and modeling are suggested in the following paragraphs.

The scope of indicators derived from integrated accounts depends on how far conventional accounts are expanded to incorporate environmental and related socioeconomic concerns. A relatively narrow approach expands only the asset boundary. Noneconomic (in the SNA sense) environmental assets, such as air, water, tropical forests, and wildlife, for which no ownership and managerial control has been established, are added to economic tangible assets. Further extensions of the production boundary introduce households as producers of economic goods and services and related environmental effects and the environment as a producer of waste disposal, space, and other physiological and recreational services. These expansions are more controversial but have been elaborated in principle in additional modules of the SEEA.

Figure 1 describes the narrow approach of incorporating environmental assets only. Even in this simplified presentation, the figure reveals the main aggregates that can be derived from this version of the SEEA. They are

  • measures of wealth, including the endowment with environmental assets, in opening and closing stocks of asset accounts
  • changes in those assets as economic and environmental capital accumulation and capital consumption
  • the mirror effect of capital consumption, that is, economic and environmental cost generated by industries and households
  • transnational environmental effects of pollution as imports and exports of waste and pollutants
  • the sum total of net production, environmentally adjusted net domestic product (EDP), obtained by deducting total (environmental and economic) cost from gross output of industries, or by adding environmentally adjusted final demand categories of consumption, net capital accumulation, and (net) exports
  • total expenditure for environmental protection as part of intermediate consumption and final uses (consumption, accumulation, and foreign trade) in conventional accounts.

Wealth: Value of Nature

Accounting for wealth and its distribution measures the availability of productive and financial capacities, as well as the concentration of economic power within and among nations and between current and future generations. Wealth accounts thus address issues of economic efficiency and equity. Of course, these issues are also relevant in the generation and distribution of income flows.

The focus of economic concern seems to have vacillated in the past between stock (wealth) and flow (income) analysis. The declining sway of socialist doctrines, preoccupied with the concentration of wealth in the hands of few, is probably the reason why national accounts, until recently, gave little attention to asset accounting. On the other hand, the explicit inclusion of stock/asset accounts in the 1993 revision of the SNA seems to have been prompted by increased attention to noneconomic aspects of human wealth, notably natural and human capital.7

The above discussion of environmental asset valuation distinguishes between natural assets “transferred” to the economy because of their use in production and consumption and environmental assets that remain outside the economic system, but may be affected (destroyed, degraded, or restored) by economic activities. The former can be valued and measured in monetary terms (market values) and their changes incorporated in the flow accounts. It is much more difficult to assign a monetary value to the latter, and usually only their change is measured through maintenance or contingent valuation.

The part in national wealth of transferred economic assets, such as mineral resources, timber from forests, or fish in the oceans, can thus be measured in national asset accounts. Just as for conventional tangible and financial economic assets and liabilities, several avenues of analytical and policy uses of broadened (produced and natural) wealth indicators can be identified.

  • Ownership and distribution of assets. Generation of individual property rights for “common-property” natural assets has been proposed to facilitate greater care and more efficient use by owners. Equity aspects of the ownership allocation need to be considered in this context. Such equity concerns include not only intra-national but also international aspects (e.g., for global commons or internationally shared resources), as well as intergenerational ones, that is, wealth to be shared with future generations.
  • Wealth and production. The analysis of the role of natural capital in economic production and growth would have to consider short-, medium-, and long-term productivity effects of capital availability and substitution of natural capital by produced and human capital.
  • Wealth and consumption. Running down (through sale and nonreplacement) of economic wealth, required in production, for purposes of consumption is usually not an option for prudent behavior, as reflected in the widely accepted income definition of Hicks, 1946. To the extent that natural assets are complementary (nonsubstitutable) factors in production, their depletion poses indeed a threat to the sustainability of production and income generation.
  • Financial aspects of wealth accounting. Owing to a general preoccupation with physical impacts on and from the environment, integrated accounting has focused on tangible asset accounts. Financial implications of the accumulation and reimbursement of “environmental debt,” that is, the total value of depletion and degradation generated in the past, have therefore been largely neglected.

Noneconomic environmental assets can be seen as providing directly to final users services, including recreation and health, but those assets may also reflect inherent values of cherished natural biota or ecosystems. These values also need to be assessed in comprehensive wealth measurements. There are, however, major valuation problems in measuring existence or option values (Munasinghe, 1993), which would have to be established through the above-described contingent or similar valuations. As already discussed, such valuations of environmental wealth are generally beyond the capability of integrated accounting. Other physical indicators would have to be used for measuring the presence and distribution of noneconomic environmental assets.

Changes in Wealth: Sustainability of Economic Growth

Economic behavior has typically been reactive, responding to observed changes in wealth. A benign neglect (World Bank, 1995) of the stock aspects of wealth in measurement, theory, and policymaking has been the result. For practical policy advice it may thus be more useful to focus on activities that create changes in wealth rather than on the results of the changes in the availability and distribution of asset stocks at a particular point of time.

As far as the capital function of wealth is concerned, activities of capital formation, capital consumption, and saving and borrowing—the sources of funding capital formation—are defined and measured in national accounts. Those indicators describe a major part of demand for the result of economic activity, NDP generated; they are also the key macroeconomic variables monitored and used to steer the economy through short- and medium-term fluctuations into long-term sustainable economic growth.

Measuring Sustainable Growth

The sustainability of economic growth was discussed above as a question of capital maintenance. Environmental depletion and degradation were blamed for the lack of sustainability that went unrecorded in accounting and thus in the minds of most decision-makers. Denial and neglect of the environmental impact of economic activity at the macroeconomic and microeconomic levels are the result. The SEEA was designed therefore to capture environmental impacts and communicate them to the decision-makers in their own—economic (money)—language. This is achieved by defining environmentally adjusted accounting indicators that can be introduced as “eco-variables” into conventional economic analysis (Bartelmus, 1994a).

The trend of national income and product is generally used to measure economic growth. Allowing not only for produced but also for natural capital maintenance in these indicators permits the definition of more sustainable economic growth as upward trend of eco-domestic product (EDP). Of course, a number of factors other than capital maintenance may affect the sustainability of future (potential) trends of the EDP. They include technological progress, discovery of natural resources, changes in production and consumption patterns, natural and man-made disasters, inflation, indebtedness, and the productivity of human and institutional capital.

Most of these factors are interrelated, affecting the potential use and substitution of capital and consumption goods and services. To the extent that substitutes avoid depletion or degradation, a weak sustainability concept would require changes in production and consumption patterns only; no (or little for adjusting production and consumption processes) cost allowances would have to be made in accounting, and no further action of resource conservation would be needed. On the other hand, a strong sustainability approach of full environmental cost accounting and conservation would be the answer to complementarities of natural asset use in production and consumption. Sensible sustainability has been advocated as a criterion that takes both complementarity and substitution in the different types of capital into account (Serageldin and Steer, 1994).

Concepts of Capital Accumulation

A key policy variable of sustainable economic growth is obtained by turning capital formation into the eco-variable of capital accumulation. Capital accumulation is defined in integrated environmental and economic accounts by introducing a broader concept of capital consumption incorporating the depletion and degradation of nature. Of course, the same alteration can also be applied to the accounting mirror of capital formation, savings, obtaining a net concept that reflects dissavings or liquidation of natural capital (World Bank, 1995).

In principle, three concepts of capital accumulation can be distinguished in integrated accounts, depending on the coverage of activities and events that affect the availability of economic and environmental wealth.

  • Capital accumulation, net of depletion and degradation costs. This indicator reflects an expanded depreciation concept, covering the loss of future uses of the environment for natural resource supply and waste disposal. The indicator is incorporated in the production accounts of the SEEA.
  • Capital accumulation, including other accumulation, that is, discoveries of subsoil assets and transfers of land and natural resources into the economic system. This indicator is based on economic decisions but accounted for outside the production and income accounts in the SEEA. The purpose is to avoid major fluctuations of income and production and to reflect the fact that natural wealth is not the result of economic production.
  • Total capital accumulation, including additionally other volume changes in natural assets. Other volume changes are largely noneconomic, such as effects of natural disasters, accidents, warfare, or natural growth.

For the first concept, the national accounts identity between investment (capital formation) and savings is maintained. For the other concepts, this identity does not hold, unless transfers and noneconomic changes of environmental assets are introduced as capital formation into the production and income accounts. It is difficult to see, however, how discoveries or natural disasters can be interpreted as economic production or capital consumption.8 In these cases, saving cannot any longer be interpreted as a source of capital formation from forgone consumption. The interpretation of these concepts would thus have to be outside national income and production analysis and possibly in terms of wealth accounting and modeling, which, as indicated above, appear to be of less use and appeal to policymakers.

The treatment of depletion of mineral resources in accounts, prepared by the Bureau of Economic Analysis (1994) in the United States, is an example of how different concepts and definitions may affect the interpretation and analysis of environmentally adjusted indicators. Discoveries of mineral resources were accounted for as capital formation, which more or less compensates for the depletion of these resources. If the exploitation of this nonrenewable resource had been entered as intermediate consumption of a raw material or as depreciation of the natural capital stock, income (value added) generated in mineral production would have been reduced by an average of 50 percent over the 1977–91 period.

Funding Capital Accumulation

As already mentioned, the current interim version of the SEEA stops short of following the process of accumulation through to its financial sources, that is, saving, capital transfers, and net lending and borrowing. International organizations, notably the International Monetary Fund and the World Bank, have been particularly concerned with this aspect of (non)sustainability or (in) stability of economies, prescribing measures of structural adjustment to indebted nations. They have been criticized for focusing on the “unsustainable raise in national liabilities” of indebted nations, neglecting at the same time unsustainability on the asset side, that is, natural-capital depletion (Repetto, 1994).

Clearly, the connections between an environmentally modified concept of capital accumulation and the financial sources available for capital maintenance deserve further scrutiny. The SNA already provides the framework for linking production and income accounts to capital and financial accounts, facilitating a corresponding extension of the SNA-based SEEA. Such extension could indicate to what extent current consumption is indeed financed by dissaving through selling off natural assets, as suggested by the World Bank, 1995.

Moreover, the relationship between long-term sustainability and short-term financial stability could also be usefully explored in this framework. For instance, it has been argued that macroeconomic stability is a precondition for preserving the environment (Gandhi and McMorran in this volume). Does this argument justify the separation of macroeconomic from environmental policy? Extended green accounting could help to assess the relevance of well-known relationships among wealth, accumulation, saving, and dissaving for environmental asset conservation and use. At the international level, pertinent questions refer to the connections between international liabilities and environmental exploitation. On one hand, natural resource exploitation might have intensified for purposes of debt servicing; on the other hand, debt-for-nature swaps could be considered as a direct response to this situation.

Of course, capital formation and liquidation are only two of the many determinants of economic performance and growth. The greening of the elements in the basic accounting identities between supply and use and between production and income points to possibilities of modifying consumption, production, and export/import functions in economic models. Such analysis might provide quite different policy advice regarding foreign trade, public and private consumption, and, by analytical extension, employment and inflation. It is beyond the scope of this paper to discuss the implications of such modified analysis for short-term and long-term macroeconomic policymaking.9

Comparing Conventional and Environmentally Adjusted Indicators

A few immediate conclusions can already be drawn from the direct comparison of conventional and environmentally adjusted indicators. Table 1 illustrates this for two experimental case studies carried out in Papua New Guinea (PNG) and Mexico.

Table 1.Conventional and Environmentally Adjusted Indicators: Mexico and Papua New Guinea
Mexico (1985)Papua New Guinea (1986–1990)1
Conventional Accounts (NDP)Integrated (“Green”) Accounts (EDP)Conventional Accounts (NDP)Integrated(“Green”) Accounts (EDP)
NDP or EDPP 42.1 billionP 36.4 billionK 2.8 billion2K 2.6 billion2
Δ CAP (net)P 4.6 billionP −0.7 billionK 0.5 billion2K 0.2 billion2
Δ CAP/NDP11%−2%12–20%3–16%
Sources: Van Tongeren and others, 1991; Bartelmus, Lutz, and Schweinfest, 1992.

Lowest and highest percentage.

For 1990.

Natural resource depletion only.

Sources: Van Tongeren and others, 1991; Bartelmus, Lutz, and Schweinfest, 1992.

Lowest and highest percentage.

For 1990.

Natural resource depletion only.

Overall, the table indicates a reduction of NDP by 13 percentage points in Mexico and between 3 and 10 percentage points in PNG (for the 1986–90 period) 10 when environmental costs are accounted for in EDP. The table also illustrates the effects of greening the national accounts on capital formation, capital productivity, and final consumption. In Mexico, net capital accumulation (CAP net) turned into a disinvestment while PNG’s capital formation was halved under the green accounting calculations. Changes in capital productivity (NDP/CAP) resulting from the inclusion of natural capital paint a different picture of capital efficiencies for the economy and its sectors (with wide fluctuations in sectoral ratios). Increases in the share of final consumption in NDP (C/NDP), to close to and over 100 percent, indicate a nonsustainable consumption pattern of living off the natural capital base.

Cost Internalization for Structural Change

Decisions about environmentally adjusted economic variables would not only be made at the macroeconomic level. Households and enterprises use the very same variables of investment, saving, and consumption in their own decision-making. Given the inefficiencies of command-and-control measures in central planning and policies, the use of different policy instruments (of cost internalization) to influence microeconomic behavior has therefore been advocated. The following shows that these microeconomic aspects of environmental policy can also be incorporated in an integrated accounting framework. As a result, linkage and consistency between micro- and macroeconomic analysis might be improved.

Accounting for Accountability

Structural distortion of the economy may result either directly from environmental impact or from responses to this impact. In the case of an environmental impact, scarce resources are misallocated to economic activities because market prices do not reflect environmental cost and thus send wrong signals of exaggerated social benefits to economic agents. On the other hand, the increasing allocation of human and financial resources to “defensive” activities has also been blamed for creating a distorted economy that allocates fewer and fewer of its resources to the generation of human well-being (Leipert, 1989).

The first step toward redirecting an increasingly defensive and destructive economy is the measurement of environmental impact and responses to this impact. Actual environmental expenditures and imputed environmental costs are therefore shown in the SEEA in connection with the economic activities that incur or cause them. Such accounting for accountability facilitates budgetary decisions about environmental expenses and the setting of measures of cost internalization for full-cost pricing. These measures include effluent charges, user fees for natural resources, deposit-refund systems, and tradable pollution permits.

The monetary valuation of environmental costs also permits their aggregation for the different sectors of the economy. Sectoral cost measurement facilitates the move from microeconomic to mesoeconomic analysis and thus the assessment of structural effects of defensive expenditures and underpricing. Of course, further aggregation for the whole economy permits the modification of conventional macroeconomic aggregates, such as NDP, national income, and capital formation.

The above-mentioned case studies in Mexico (van Tongeren and others, 1991) and Papua New Guinea (Bartelmus, Lutz, and Schweinfest, 1992) provide examples for significant distortions in the economy owing to the environmental costs generated by different industries. In Mexico, for instance, value added dropped to -13 percent of its original value in the forestry sector and to about 18 percent in the mining (largely oil) sector, if environmental depletion and degradation were accounted for. Less dramatic, but still significant, is the reduction to 73 percent (1989) for Papua New Guinea’s main industry of (gold and silver) mining.

Accounting versus Modeling

These figures show the significance of environmental costs, in particular resource-intensive or highly polluting or degrading industries. They do not provide an answer to the question of whether cost internalization is justified in real-world situations where other—mainly monopolistic—market imperfections cast doubt on the assumptions of perfect competition and market transparency. Those assumptions usually underlie the claim of optimality in resource allocation, resulting from full-cost pricing.

The semi-fiction (Solow, 1992) of these assumptions and the murky issue of justifying second-best solutions in this situation could explain why economic policy has focused mostly on the direct use of macroeconomic variables rather than on optimizing models that may be quite removed from reality. Perhaps the time has come now to reassess cherished optimality criteria at the microeconomic level, with a view to replacing them, at least in part, by more strategic approaches. The recent Nobel Prize award in economics to pioneers in game theory might be an indication that economic behavior needs explanation in strategic terms rather than by the invisible hand.

Still, those models provide the theoretical justification and definitions for most economic variables and indicators. From this point of view it can be questioned if the accounting system can, at least on theoretical grounds, provide the correct information for setting up fiscal (dis)incentives, that is, market instruments, in integrated environmental-economic policymaking. To the extent that imputed environmental costs are already accounted for in microeconomic budgets, integrated accounting represents just a correction of inaccurate national accounts. There is indeed some indication that such accounting is carried out at the corporate level in the case of depletion of natural resources and in anticipation of liabilities for hazard-prone activities.11 On the other hand, when such accounting does not take place, the ultimate incidence of hypothetical costs caused can be traced only through modeling microeconomic behavior. The above-described first-step allocation of imputed costs would provide the starting-point information for such modeling.

These issues are sometimes raised when questioning the need for incorporating environmental costs into the national accounts, even as satellite accounts. The argument is that the accounting for hypothetical environmental costs is an analytical approach that should be dealt with by modeling rather than solid (in the sense of actual observation) accounting.12 There is, however, a difference in modeling and accounting that should be borne in mind before relegating environmental (monetary) accounting to modeling. While environmental accounts make use of real costs, either observed as actual expenditures or derived from engineering studies, analytical models, for example, of cost incidence, have to make assumptions about the optimizing behavior of economic agents.

Ideally, close links between accounting and modeling should be maintained, making the question of cutoff between accounting and analysis somewhat esoteric. In practice, however, official statisticians seem to shy away from analysis, supposedly to guard their reputation of providing validated observations of the real world. On the other hand, the capabilities of statistical frameworks, such as the SEEA, to provide standard concepts of links among indicators that can be used as policy variables get lost if they are left to myriads of modelers and analysts. Rather than walking away from any particular accounting result, national accountants should make a greater effort at shaping their data to be relevant for policy analysis. This applies particularly to the field of environment, which has become a mainstream issue of sustainable growth and development.

Limits of Monetary Accounting

From Valuation to Evaluation

Monetary valuation and much of economic analysis reach their limits where such valuation becomes arbitrary with increasing remoteness of the effects of economic and noneconomic activities and natural processes from economic production. Social goals and values of equity, political freedom, culture, or the health of humans and ecosystems are difficult to measure in physical terms and quite impossible in money terms. The above-described cost-borne (contingent) valuations attempt to capture some of these welfare effects—with limited success.

A comprehensive concept of development—as opposed to economic growth—would have to consider all these noneconomic amenities as part of the overall goal of improving the quality of human life. As indicated above, concepts of maintaining the capital base of the provision of these amenities do not apply when focusing directly on the sustainability of (the welfare of) human beings.

In the absence of consensus on human needs and aspirations, targets or standards will have to be set by governmental fiat or expertocratic decision. At the same time, limits and constraints in meeting needs and aspirations, posed by nature and by overriding social values (e.g., equity, tradition, or culture), would also have to be considered in formulating development programs.13 Such standard and limit setting would turn the analysis of the sustainability of development into one of the feasibility of development programs, complying (or not) with an exogenously set normative framework (Bartelmus, 1994a). Monetary valuation is replaced by social evaluation.

Indicators of Sustainable Development

Measures of standard compliance or violation are difficult to integrate or compare, since the pertinent indicators are measured in different units and may be intercorrelated. Overall indices such as the Human Development Index (HDI), proposed by the United Nations Development Program (UNDP, 1991), can therefore be criticized for applying arbitrary weights in adding or averaging the underlying indicators.

A compromise is to select key indicators that either reflect a broad area of analysis (such as the average life expectancy of a population) or can be aggregated through equivalence factors reflecting their relative contribution to particular themes (de Haan and Keuning, 1995). Of course these indicators or indices can still not be fully integrated with economic indicators in the absence of a common numéraire. Attempts have been made at least to juxtapose environmental indicators next to economic ones within an accounting system; there is a risk, however, of overloading the system with physical data or, alternatively, under-representing noneconomic phenomena through arbitrary selection of indicators.14

Probably, a more transparent way of organizing and displaying indicators is to develop and present them in a Framework for Indicators of Sustainable Development (FISD) (Bartelmus, 1994c). Such a framework would facilitate the rapid identification of indicators and their linkage with interactive processes.15 It remains to be seen to what extent these indicators and indicator systems can supplement or replace integrated accounting aggregates and systems. The above stress-response analysis of integrated accounting is a starting point for linking physical indicators and monetary accounting aggregates since it applies the same organizational criteria commonly used in indicator frameworks.

Outlook for Implementation of Integrated Accounting

National Programs of Environmental Accounting

UNSD has assisted developing countries in carrying out projects of SEEA implementation. To date, projects have been or are being conducted, with the support of UNEP, UNDP, or the World Bank, in Colombia, Ghana, Indonesia, Republic of Korea, Mexico, Papua New Guinea, and the Philippines. Given the novelty of the proposed concepts and methods, these projects are experimental. Their purpose has been to demonstrate the feasibility of integrated accounting and possible uses of their results in integrated planning and policymaking.

A phased implementation has therefore been favored by most developing countries. In the first phase, a pilot project is typically carried out by a research institute in collaboration with key data users and producers. After assessing the results, the second phase is to institutionalize integrated accounting through incorporation into official statistical work. The Korean and Philippine projects are examples of where such institutionalization is contemplated (by the Bank of Korea) or actually pursued (by the National Statistical Coordination Board of the Philippines).

Most pilot projects were initiated by a national seminar that brought together policymakers, nongovernmental organizations, researchers, and data producers. In several cases, these seminars were an innovation in cross-disciplinary collaboration of national organizations in environment and development. This collaboration was then anchored in a supervisory committee that had the task of following closely the progress in the implementation of integrated accounts and supporting data compilation. In line with the pilot character of the projects, no new data collection efforts were carried out; rather, existing data were compiled within the SEEA framework. Missing data were identified for possible estimations or inclusion in future surveys.

If nothing else, this process identified significant data gaps and called attention to major interactions and repercussions among diverse areas of natural resource management and economic policy. It appears, from the above-mentioned case studies, that integrated accounts can be compiled in both physical and monetary terms even in countries with limited statistical capabilities. The argument that basic environment statistics programs have to be established first before an integrated counting project can be initiated is thus not confirmed by experience to date. Another argument for delayed action in this area has been the need to gain experience first with selected natural resource accounts, such as forest or water accounts. While such accounting might indeed provide useful information for the management of a particular resource, it is hardly useful for comprehensive, integrative policies of sustaining growth and development. Moreover, accounting for selected natural resources has typically been conducted outside the national accounts framework, impairing consistency with national accounts identities and aggregates, and making it a one-time research effort.

Of course, these tentative conclusions from a few case studies require confirmation through further experience with integrated accounting in developing and industrialized countries. Considering the above-mentioned stimulation of cross-disciplinary cooperation and experience gained in data collection and analysis, the benefits of embarking on an integrated accounting project seem to outweigh the relatively modest costs of a pilot project (of about US$120,000).

International Cooperation

International seminars on environmental and natural resource accounting, conducted jointly by UNSD with UNDP or UNEP, generated numerous requests for advisory services, training, and financial support of country projects. This was anticipated by UNCED, which requested UNSD to support, in collaboration with relevant UN agencies, countries in establishing integrated environmental and economic accounts (United Nations, 1993c).

However, UNSD’s technical cooperation program, which covers a wide range of applied statistics, could not cope with all these demands. At the same time, a large variety of national, international, governmental, and nongovernmental institutions used this surge in interest about green accounting for experimenting with their own particular approaches in different developing countries. Duplication of work, confusion about methodologies, and turf fighting were the result.

There is an urgent need for better use of existing mechanisms of coordinating international statistical work in environmental accounting. In environment statistics, several mechanisms are in place. An Inter-Governmental Working Group on the Advancement of Environment Statistics has met regularly to discuss the development and coordination of environmental and sustainable development indicators and their links with environmental accounting. Also, a Task Force on Environment Statistics was created by the Statistical Commission of the United Nations to develop an “integrated work program” in environmental statistics, indicators, and accounting. However, the Task Force, at its first meeting, cautioned that differing mandates of international organizations do not yet permit the full integration of programs.

Perhaps more promising are recent plans advanced by UNDP and the World Bank to address specifically the area of environmental accounting by creating a “global project” of such accounting (UNDP), or by organizing a working group of developing countries that already compile integrated accounts (World Bank). The latter would be similar in nature to the “London Group” of national environmental accountants, which decided to restrict its membership to industrialized countries only. The aim of both efforts should be to reach some consensus on concepts and methods and to coordinate international support of national programs.

The second special conference of the International Association for Research in Income and Wealth in Tokyo (March 5–8, 1996) will examine to what extent such consensus has already been reached or where further standardization needs to be developed. Eventually this process could lead to a revision of the interim United Nations, 1993a, proposals on Integrated Environmental and Economic Accounting and the adoption of international guidelines or recommendations in this area. UNSD, in collaboration with other international organizations, is prepared to play its part in this revision.


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Note: The author is a staff member of the United Nations Statistics Division (UNSD). The views expressed here are those of the author and do not necessarily reflect an expression of opinion on the part of the United Nations. Stimulating observations by S. Keuning, G.-M. Lange, F. Neto, and Jan van Tongeren are gratefully acknowledged.


A development strategy focusing on the satisfaction of “basic human needs” was advanced in 1974 by a joint UNEP/UNCTAD symposium in Cocoyoc and widely publicized by the 1976 World Employment Conference. However, developing countries generally considered this strategy as a diversion from the negotiations for a New International Economic Order and as an intrusion into national sovereign development policies.


Much of the following discussion of sustainability in growth and development is based on Bartelmus, 1994a, which should be consulted for a more detailed treatment of the subject.


Various methods have been proposed for estimating the market value of natural “economic” assets and changes therein, including the calculation of the present value of future net returns from asset use, replacement cost derived from potential discoveries, and simplifications of the present-value method by using “net prices” or “user-cost allowances.” See Bartelmus and van Tongeren, 1994, for a discussion of the advantages and drawbacks of these methods.


Economic assets are defined in the 1993 SNA as those assets (including natural assets) over which ownership rights are enforced and which provide economic benefits to their owners.


The reservations of some national accountants about such “normative costing” are not quite comprehensible, since it is in line with the equally normative costing of capital consumption in conventional accounts—as the cost of maintaining intact the stock of fixed assets used up in production and that “should be sufficient to enable the assets to be replaced, if desired” (1993 SNA).


Such as free-rider attitudes, short-sightedness of consumers about long-term environmental impacts, and effects of income levels and distribution when questioning individuals in opinion surveys and other attempts at revealing and aggregating preferences for environmental quality and related social values.


As already discussed natural economic assets are included in the 1993 SNA asset accounts and balance sheets. Less attention is paid to human capital, except for suggestions of reclassifying education and health expenditures from final consumption to capital formation. Further work on “human resource accounting” is currently being done by UNSD (van Tongeren and Becker, 1994).


It has been argued, on the other hand, that such “windfalls” of capital gains and losses would make national income “a useful measure of real social income” (Hicks, 1946, p. 180).


For a discussion of some of the possible implications of environmental costing in planning and policies for sustainable growth and development, see Bartelmus, 1994a, Chapters 4 and 5. It should be noted in this context that, while environmental questions are usually viewed as long-term accumulation of depletion and degradation, some of those impacts may result also in the short-term and may be intensified or lessened by short- and medium-term fluctuations in economic activity. Short- and medium-term effects and repercussions of business cycles between the economy and environment might thus deserve greater attention in planning and policymaking (Munasinghe, 1995).


Of course, such a period is too short to demonstrate any differences in trend between NDP and EDP; for a more detailed discussion of the use of these and other macro-indicators in national (PNG) strategies for sustainable development, see Bartelmus, 1994b.


For example, balance sheet provisions for potential toxic waste cleanup seem to have been made by U.S. chemical concerns (Monsanto, Du Pont, Cyanamid Corporations) (Wall Street Journal, March 23, 1992).


See, for instance the discussions and contributions to the second meeting of the so-called “London Group” of national accountants in Washington, D.C. (March 15–17, 1995), in particular papers presented by Hill and Harrison, 1995, and de Haan and Keuning, 1995.


Minimum standards and maximum limits or thresholds relevant in such analysis can be categorized as (a) standards of living, (b) natural resource capacities and pollution standards, (c) limits of ecological carrying capacity, (d) equity standards of the distribution of income and wealth and environmental costs and benefits, and (e) other cultural, political, and sociodemographic standards or targets (Bartelmus, 1994a, p. 72).


This seems to be the case in several proposals from national accountants who attempt to meet the demand for green accounts by listing environmental and related social indicators together with conventional accounting information. The Dutch NAMEA (de Haan and Keuning, 1995) is a protagonist of these approaches.


The proposed FISD attempts to link aspects of indicator use, reflected in Agenda 21 (United Nations, 1993c), with issues of data availability and production, reflected in the United Nations (1984) Framework for the Development of Environment Statistics (FDES). Other, similar frameworks have been proposed mostly by the user community (United Nations, 1995; SCOPE, 1994; World Bank, 1995). One drawback of these proposals is that they seem to be more of wish lists (of desirable information) than realistic proposals for recurrent data collection at national and international levels.

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