Abstract

The environment is generally accepted as an area of government and popular concern, and it is of great importance to have information on the environment properly reflected in statistics. While environmental statistics cover a broad range of topics and issues, this paper concentrates on economic aspects of environmental statistics. As economic activities, such as production and consumption, impact on the environment and the environment impacts on economic activities, it is important to link information on the environment with information on the economy.

The environment is generally accepted as an area of government and popular concern, and it is of great importance to have information on the environment properly reflected in statistics. While environmental statistics cover a broad range of topics and issues, this paper concentrates on economic aspects of environmental statistics. As economic activities, such as production and consumption, impact on the environment and the environment impacts on economic activities, it is important to link information on the environment with information on the economy.

The system of national accounts, one of the most powerful tools for economic analysis, is an eminent framework for reporting links between the environment and the economy. The System of National Accounts 1993 (1993 SNA) argues that this should be developed from the central framework (through a system of satellite accounts) rather than changing or replacing the basic system. This paper studies alternative approaches and outlines some thoughts for the implementation of environmental accounting, given the status of the basic data and currently available methodologies.

Economic and environment-accounting issues concern the depletion of natural resources as well as the degradation of the environment. The two approaches to the development of a system of environmental satellite accounts are a physical and a monetary approach. Both approaches are based on physical data on the environment; but in the physical approach these data are linked to the national accounts, while in the monetary approach they are internalized in an accounting system through monetization. The basic thrust of the monetary approach is to monetize the depletion of natural resources and environmental degradation and to record these as costs. This does not seem viable in the short term, since valuation and other problems still need to be resolved before this approach can be successfully implemented. Nevertheless, a case could be made for improving the accounting of natural resource depletion within the core system. In the short term it would be more promising to link national accounts data with physical data on the environment through the accounts or in the framework of supply and use tables. Studies in the Netherlands, for example, demonstrate that environmental supply and use tables could be used to estimate levels of pollution associated with various levels of production.

The paper begins by outlining the main approaches to environmental accounting, assessing the relative merits and problems of each approach. The paper then discusses whether green national accounting should replace the traditional national accounts, or whether green accounts should be developed as a supplement to the system. Subsequently, the paper describes the practical experiences of two countries that have attempted to incorporate information on the environment in their national accounts. Based on these assessments, the paper concludes with suggestions for possible future actions and research regarding environmental accounting, including possibilities for practical statistical implementation.

Methods and Problems

Environmental Indicators and Statistics

Traditionally, environmental statistics have concentrated on the collection of physical data about a wide variety of environmental aspects of the quality of life, such as information on pollution levels and environmental degradation. Physical data on the quality of life also may concern the variety and viability of species, often indicated by the number of survivors of a threatened species. Welfare issues also have been raised regarding health, life expectancy, and poverty.

On the basis of these data, environmental indicators have been constructed “… to reduce a large quantity of data down to its simplest form, retaining essential meaning for the questions that are being asked of the data” (Ott, 1978). According to Tunstall (1979), environmental indicators can (1) assess environmental conditions and trends on a national, regional, and global scale; (2) compare countries and regions; (3) forecast and project trends; (4) provide early warning information; and (5) assess conditions in relation to goals and targets.

Although statistics on the environment have been collected for a long time (some countries began collecting these statistics in the 1970s) and have provided valuable insights into environmental problems, in the view of many people concerned with the progressive deterioration of the environment, they did not have a sufficient impact on public awareness and government policies because these statistics did not sufficiently demonstrate economic impacts. Answers to this problem have been sought through the development of sustainable growth indicators and green (or environmental) national accounts. This paper focuses on the latter.

Resource Depletion and Environmental Degradation

Analysis of environmental issues is often divided into natural resource depletion (using up oil, gas, minerals, fish, or forests) and environmental degradation (air, soil, and water pollution). Although all economies must confront both sets of issues, depletion of natural resources is often seen as a problem primarily for developing countries, while industrial countries tend to focus more attention on the impacts of pollution. Adjustments to national accounts for natural resource depletion are sometimes referred to as “green” national accounts, while national accounts adjusted for environmental degradation are sometimes referred to as “brown” national accounts. This paper will not pursue this distinction further, but will refer to both as “green” national accounts. The development of a system of integrated environmental and economic accounting will need to take both sets of issues into account. The approaches described below attempt to begin that process.

Two Approaches to Environmental Accounting: Physical and Monetary

A system of green accounts can be developed through a physical approach or a monetary approach. In the physical approach to green national accounting, physical data are linked to the national accounts, while the basic thrust of the monetary approach is to monetize environmental degradation and depletion of natural resources and record these as costs. Although this may seem obvious, it should be pointed out that both approaches need physical data on the environment.1

The importance that national accountants attach to environmental issues is illustrated by the fact that the most recent version of the globally accepted handbook on national accounts, the 1993 SNA, 2 includes a chapter, “Satellite Analysis and Accounts,” describing a system of environmental economic accounts (SEEA) based to a large extent on Integrated Environmental and Economic Accounting (UN Handbook). The 1993 SNA describes both natural resource accounting, which focuses on physical aspects of the accounts, and monetary accounting, which identifies expenditures on environmental protection and the treatment of environmental costs. As noted in the 1993 SNA, this description is to be considered a work in progress.

Physical Approach

The 1993 SNA notes that substantial progress has been achieved in developing the physical approach to environmental accounts. The central framework of the national accounts already depicts aspects of environmental accounting. Nonproduced natural assets, which are under the effective control of institutional units and may be expected to yield benefits to their owners, are deemed economic assets and therefore are included within the boundary of the system of national accounts. However, the central framework does not include externalities concerned with the use of the environment. The core innovations of the approach taken in the 1993 SNA chapter that describes environmental accounting are additions of the “use of non-produced natural assets” and “other accumulation of non-produced natural assets.” These extensions are needed to account fully for natural resource degradation, depletion, and transfer of natural assets to economic activities. Although natural assets that do not fulfill the criteria of ownership and economic benefits are excluded from the central framework, they can be included in environmental satellite accounts. Environmental degradation and depletion can be measured in physical and monetary terms, but the 1993 SNA admonishes readers to use extreme caution with the monetary approach, owing to the controversial nature of the valuation of environment costs and capital.

The inclusion of data on the environment, proposed in the 1993 SNA chapter on environmental accounting, is developed mainly through matrices that show the traditional national accounts data on production and consumption in combination with data on the use of natural resources. It has been argued that green national accounting should be extended to include the full sequence of the national accounts in order to demonstrate all effects of the use of the environment. The UN Handbook recognizes that “the use of environmental functions not only has impacts on the production and use of goods and services but also affects the income and accumulation accounts” (United Nations, 1993, paragraph 96), but it does not pursue this idea further.

The 1993 SNA and the UN Handbook mention the possibility of linking physical data on the environment to the national accounts through input-output tables. The UN Handbook refers to the classic article by Leontief (1970), but this possibility is not developed further in these manuals. A type of input-output table particularly suited to linking production and consumption with environmental effects concerns supply and use tables combining detail on products with detail on producers (input-output tables usually focus either on products or on producers). The rows of supply and use tables provide information on the supply of goods and services through domestic production and imports, and the use of those products through domestic consumption and exports; this information can be supplemented with information on the pollution that the production and use of those goods and services entails. Likewise, through the columns of these tables that provide, inter alia, information on the producing industries, pollution can be linked to industries.

Supply and use tables are limited in the sense that they focus on production and consumption, but this approach can be further extended through the use of social accounting matrices that provide a link to other economic processes, such as the sectoral distribution of income, saving, and capital formation. Further, through social accounting matrices the national accounts can be related to data relevant to welfare, including data on employment, education, poverty, and health.

This approach could yield estimates concerning levels of pollution corresponding with expected or projected levels of activity or use, or vice versa, levels of activity corresponding with predetermined levels of pollution. Through the use of scaling techniques, such as linear programming, this approach would also allow the estimation of sustainable levels of economic activity and concomitant growth rates. Critics of these methods have mentioned that this type of economic analysis goes beyond pure statistics and involves economic modeling.3 However, the use of these methods to depict the relationships between economic activities and the environment seems extremely relevant.

Monetary Approach

Historically, efforts to monetize the use of natural resources have been triggered primarily by the concern that national accounts aggregates, such as GDP, which are generally accepted indicators of economic growth, do not adequately reflect the effects of the environment on the economy. Even though, arguably, certain elements concerning the environment are already included in the national accounts (for example, costs to abate pollution are included that reflect taxes imposed on production or consumption causing pollution), it should be recognized that the national accounts currently do not include externalities associated with the use of the environment that in the view of many are far more significant than the environmental elements presently included. An important aspect of the monetary approach is that it could generate alternative measures of economic activity, such as “eco GDP” or “green GDP,” that take into account environmental externalities and that could serve as indicators of sustainable growth.

The basic idea behind the monetary approach is that (presumably negative) externalities connected with the uses of natural resources may involve costs (just like the use of any other scarce resources), and that these costs should be internalized to facilitate a more balanced view of the economy and of economic development. From this perspective, market prices are misleading because they do not reflect these externalities. Therefore, the fundamental issue facing those attempting to implement this approach is the search for prices that accurately reflect these externalities.

The methods used to value these environmental externalities have included (1) the willingness-to-pay and other shadow prices, and (2) abatement, avoidance, defensive, maintenance, and other cost measures. Estimating shadow prices requires large amounts of data for the construction of marginal costs and marginal benefit curves. In addition, willingness-to-pay and other shadow prices have been controversial for conceptual reasons4 and also have turned out to be difficult to estimate. Shadow price estimates require behavioral assumptions and are sensitive to the selection of modeling techniques.

At present, the use of abatement or maintenance costs is advocated widely, especially in the context of the assessment of externalities through levels of pollution or other physical deterioration and environmental degradation. The underlying philosophy of the valuation approach through abatement costs parallels the Hicksian income concept, that is, a sustainable use of the environment implies that the quality of the environment should be the same at the end of the accounting period as it was at the beginning. Under this approach, deterioration of the environment should be valued at the cost of preventing or redeeming the deterioration. Although this method is concrete and practicable, as estimations of these costs can be derived from engineering projects, the required estimates are sensitive to the underlying assumptions. Further, these costs do not intrinsically relate to the quality of the environment and they may not correspond to the amount of damage incurred (substantial damage may be abated at little expense, while insignificant damage may require extensive outlays). Another objection concerns the validity of the growth rates derived from this method as indicators for sustainable growth. Because engineering costs can be expected to dwindle over time as a result of technological developments, corresponding abatement costs also will diminish. Thus, a deterioration in the environment can be masked by diminishing abatement costs.

The inclusion of externalities in the national accounts would change the emphasis of the national accounts from observed statistics to economic modeling. The 1993 SNA uses two kinds of output prices: basic prices and producer prices. Both are actual transaction prices, which can be directly observed and recorded (1993 SNA, paragraph 6.205). The prices used in the national accounts are mainly observed market prices irrespective of market structures; however, prices do not appear in the market for many of the items needed to determine values in a set of green (or brown) national accounts. It is at this point that producers of environmental accounts would need to make assumptions about market structures and competitive behavior. Because externalities, such as costs inflicted on other parties without compensation, are not reflected in economic transactions, their inclusion requires assumptions about economic behavior that are not based on observed facts.

The monetary approach to green national accounts is increasingly recognized as involving the distinction between observed statistical data and economic modeling. For instance, estimating green GDP through the deduction of abatement costs from traditional GDP introduces a departure from observed reality and is in fact a model exercise on the basis of assumed relations between variables. This recognition is important because observed statistics and model estimates differ with respect to their reliability.

Although the assumptions of green GDP models have not been spelled out, one apparent implicit assumption is that the inclusion of environmental costs would not invoke a reaction from the economic actors. Critics have pointed out that this is not a realistic assumption, since both producers and consumers are likely to change their behavior if either bears abatement costs. This would probably affect production, consumption, and other economic processes, such as income distribution and saving.

A much less contested aspect of the inclusion of abatement costs in the national accounts is the inclusion of the depletion of natural assets (Levin, 1993). It has been argued for countries with production processes that are largely dependent on the depletion of subsoil assets, such as oil, gas, or coal, that the use of these assets has not been well described previously by the traditional national accounts, which did not recognize this nonproduced wealth as an economic good. The 1993 SNA recognizes that these nonproduced goods are economic assets because they can be subject to ownership and provide benefits to their owners, but does not include the use of these assets in the description of the production process in the core accounts. At present national accountants tend to recognize this as a deficiency, and it is argued that the 1993 SNA should be revised accordingly. However, a consensus has yet to be reached on whether the depletion of natural resources should be recorded as a depletion of capital (which would leave GDP unaffected) or as a use of stocks (which would affect both gross and net aggregates).5 Furthermore, it should be decided how the depletion should be valued; alternatives include (1) valuation on the basis of actual market prices of the assets, (2) valuation of the present discounted value of expected net proceeds, and (3) valuation on the basis of net prices that reflect actual market prices of the raw products, exploitation costs, and a rate of return on invested produced capital.

Environmental National Accounting: Supplement or Substitute?

Whether environmental accounting should be seen as a supplement to the central framework of the national accounts or should replace the traditional national accounts altogether is hotly debated. Since the physical approach to national accounting does not provide monetary values, this debate primarily concerns the monetary approach to environmental accounting. For instance, a brochure circulated ahead of a conference on environmental accounting, hosted by the European Union Parliament in Brussels during May 31-June 1, 1995, strongly indicated a preference by the organizers to replace the traditional national accounts through a “global adoption of Green Accounting.” Although many national accountants, to a greater or lesser degree, recognize the validity of the environment-based critiques and embrace the development of green national accounts, they prefer to see this development as a supplement to the core national accounts through the satellite accounts rather than as a substitute.

This preference for green accounting as a supplement rather than a substitute is reflected in the 1993 SNA and the UN Handbook. The 1993 SNA proposes the development of environmental accounts as a satellite system linked to the core national accounts; and the UN Handbook mentions as its immediate objective “to provide a framework for implementing an SNA (satellite) system for integrated environmental and economic accounting (SEEA)....” Neither the 1993 SNA chapter on environmental accounting nor the UN Handbook would provide a sufficiently comprehensive framework to allow replacement of the traditional national accounts. As has been mentioned above, both the 1993 SNA chapter on environmental accounting and the UN Handbook relate to aspects of production and consumption and do not comprise a full system of accounts, which would include financial accounts, transactions with the rest of the world, and balance sheets.

This preference for a satellite SEEA linked to the traditional national accounts is caused by problems with green accounting (as noted above) and also by the nature and use of traditional national accounts. Although the national accounts constitute a multipurpose system, it would be impossible to create a system to respond to all demands concerning national accounting; answering demands from specific users would frustrate other users. For instance, the national accounts’ focus on observed data, mainly based on market values or costs, impedes their use for analyses of welfare issues, such as distribution of wealth, income, and labor. Similarly, this focus impedes the inclusion of nonmonetary market activities, such as unpaid household activities, voluntary services, and externalities. On the contrary, inclusion of these aspects would hamper many traditional uses of the national accounts, such as economic forecasting, and the development and monitoring of economic policies. For example, the inclusion in the national accounts of unpaid household activities would hamper the use of GDP as a denominator for important financial and fiscal indicators, such as measures of liquidity and the government budget deficit. Since these indicators are of a purely monetary nature, they could not be related sensibly to a denominator including substantive nonmonetary elements.6

For these reasons, it has been argued that although the traditional national accounts may be deficient in some respects, they are too important to be abolished or replaced. Metaphorically, physicians use body temperature as an indicator of a patient’s health. Even though they know that this does not provide the whole picture, they do not want to throw away the thermometer.

This preference for a satellite account approach is recognized on a political level, as indicated by a 1994 communication from the Commission of the European Communities to the Council of the European Parliament stating that further integration of economic and environmental information systems aimed at “greening” national accounts following the satellite approach should be intensified.

Practical Experience

The United States and the Netherlands have made significant efforts to incorporate environmental links to their national accounts.7 Both countries have taken the recommendations of the 1993 SNA as a point of departure. They have not altered the central framework of the national accounts, but have developed satellite accounts to show the connections between the national economy and the environment.

United States

In 1992 the U.S. Bureau of Economic Analysis (BEA), Department of Commerce, began its work on natural resource satellite accounts and accelerated this project following President Clinton’s 1993 Earth Day address making work on developing a “green GDP” a priority. In May 1994 the BEA released results of their efforts to develop integrated economic and environmental satellite accounts, in which mineral resources were treated as productive assets. This work builds on and complements the BEA’s national accounts and is designed to highlight the interaction of the economy and the environment. The BEA also has formulated plans to extend this work to fish stocks and forests; however, budgetary constraints have prevented further work in this area.

The BEA study covering 1958–91 included oil, gas, coal, metals, and other minerals. The study applied four alternative valuation methods, and two of these applied different present discount values of 3 percent and 10 percent, respectively. To illustrate the economic importance of mineral resources, the BEA’s analysis revealed the following. First, that “proved” mineral reserves added up to 3–7 percent of private capital stock in the national economy. Second, the 1991 value of the stock of proved subsoil mineral resources was approximately equal to two to four times the mining industry’s stock of structures, equipment, and inventories. Third, average rates of return in the mining industry were lower when resource depletion and additions to income and production were taken into account. For the study period, 1958–91, the industry rate of return was only 4—5 percent, in contrast to the roughly 23 percent before the impacts on mineral resources were included in the national accounts. Fourth and perhaps most important, in constant 1987 dollars, additions to mineral resources as productive capital roughly offset depletions, leading to a negligible impact on net domestic product.

The Netherlands

Statistics Netherlands has produced and published a National Accounts Matrix extended with Environmental Accounts in physical units (NAMEA) for each year covering 1989–91. The NAMEAs identify, for each economic activity, an overview of related pollutants, such as carbon dioxide, CFCs, nitrogen oxide, ammonia, and phosphorus. Subsequently, these pollutants were grouped according to the environmental problems with which they were associated. Based on the contributions of the pollutants to each problem, five summary environmental indicators were estimated. Both the environmental indicators and traditional economic indicators were included in one information system. One of the advantages of this satellite system and the available time series is that (ex-ante and ex-post) forecasting and policy-based models can be developed using this information to estimate green GDP (through scaling techniques such as linear programming), as well as to estimate social indicators. Communication by the Commission of the European Communities to the Council of the European Parliament in December 1994 proposed to establish a European System of Economic Environmental Indices based on work similar to the NAMEAs.

Conclusions

The statistical coverage of environmental concerns in a national accounts framework commands widespread support, primarily because this would further public awareness and benefit the development and the monitoring of environmental policies. Several approaches, each having its merits and limitations, have been applied to achieve improved coverage. Among statisticians, and certainly among national accountants, it is generally recognized that whatever approach is taken, coverage of the environment in a national accounts context should be provided through the development of satellite systems linked to the national accounts, and not through a replacement of the national accounts.

Concerning the relative merits of the physical and monetary approach to national accounting, the debate should continue, and it seems useful to develop both approaches further. Although statistical considerations have to play a prominent role in this debate, it is of great importance also to take a user-oriented perspective. An important element in this respect is to determine how to further public awareness and environmental policies in an optimal manner. A single macroeconomic indicator such as green GDP may well serve to promote general awareness concerning the environment, but is less useful for the development and the monitoring of specific environmental policies. To serve the latter objective, environmental statistics need to be linked to the national accounts on a detailed level. It might be useful also to develop a range of relevant national indicators.

Both the physical and the monetary approach require further development. Concerning statistical implementation, whatever approach is used to link environmental statistics to the national accounts, there is a primary need for physical data on the environment. All applications of the physical and monetary approaches need these data. The development of environmental statistics clearly should precede coverage of the environment in the national accounts. Developing standards in this area also is an issue for international coordination, but decisions on the relevance of various environmental concerns will have to be made at the national level.

The physical approach is much less fraught with theoretical problems than the monetary approach. Techniques such as input-output analyses and linear programming are well developed. This is not to argue that these techniques are not amenable to further development, but there is a well-established framework for data presentation and manipulation, and no valuation of externalities is needed. The main problem facing the physical approach seems the availability of the basic data to develop supply and use tables. Many countries find it difficult to implement these tables in view of resource constraints and the lack of sufficiently detailed source data.

To further develop applications of the monetary approach, clearly more theoretical work has to be done on improving valuation techniques; eventually a global consensus should be sought on this issue to ensure the international comparability of the national statistics. However, this is not only a matter of developing theoretical concepts, but also of collecting data and building up experience with the use of these data in a national accounts framework. Although it is encouraging that practical experience has already been gained in a number of countries, these experiences also demonstrate that there still is more work to be done to achieve reliable results.

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Discussion

Discussant’s Comments

Michael Ward

As befits someone who has served longer in the trenches of environmental accounting than almost anyone else, Peter Bartelmus, with his customary eloquence and erudition, discusses in his paper the issues and problems the approach to integrated environmental and economic accounting raises from a conceptual and generic perspective. But for reasons that become apparent in the detailed thread of his argument—to which I will refer later—his finely tempered enthusiasm does not quite border on an unrestrained exuberance for a fully integrated and comprehensive environmental accounting system. As nobody’s trencherman, Peter also raises a number of pertinent practical questions concerning the relevance of the primary direction of this approach.

The paper by Bloem and Weisman, as might be expected from such a strong policy-oriented institution as the Fund, is more pragmatic. It focuses on some of the more intractable and systemic measurement concerns. The authors question implicitly the relevance of environmental accounting to fiscal and monetary management and overall macroeconomics strategy. Understandably, they see the need to preserve the integrity of GNP within existing SNA concepts, assigning environmental questions to the realms of a statistical hyperspace inhabited by freely orbiting satellite accounts. The essential difference between “integrated,” on the one hand, and “national accounts and (separately) the environment,” on the other, emerges very clearly.

I approach this subject from both a conceptual and practical point of view, recognizing in the process that the protagonists for different positions must tread delicately over a path strewn with institutional eggshells. Were it possible by common agreement to marshall all the resources of statistical alchemy and illusionism on this fascinating topic, it would still be doubtful whether the numerologists could convincingly demonstrate the superior power of statistics over environmental phenomena, at least in improving official understanding of how every development strategy gives rise to a different environmental issue.

With comparatively little fanfare, economists have been able to establish themselves as the new, self-appointed global guardians of green living. As well-trained bloodhounds, with good noses for sniffing out anything that smacks of a resource utilization or allocation issue, they have been able to highjack the environment and redefine popular basic concern within the acclaimed paradigm of sustainability. Now, while this may seem eminently sensible from the standpoint of macroeconomic policy and the Bretton Woods Institutions, it does tend to narrow down the scope of the issue from its original broader public perspective. It may be recalled that public awareness of the environment came first to general attention through a justifiable genuine concern with a perceived decline in the overall quality of life. Worries about global warming, pollution, and environmental degradation, especially as these have impacted on the survival of natural species and affected human well-being, have been far more to the forefront than sustainability per se.

Bringing environmental concerns into an economic context, nevertheless, does recognize that many present problems encountered by policymakers find their roots in a past “hands off attitude that implicitly condoned the unbridled pursuit of economic gain. This approach prevailed despite the fact it could lead visibly to the deterioration of resources through excessive exploitation and thus result in the eventual depletion of limited exhaustible and nonrenewable natural resources previously thought of as being abundantly available and hence free. Peter Bartelmus understandably remains uncomfortable with this paradigmatic shift to sustainability, referring to the notion as opaque and murky. He underlines the fact that sustainable development stresses the importance of economic activities over human beings and the natural environment. Consequently, he seriously questions whether the sustainability of production is an acceptable proxy for sustainable human wellbeing. In noting that the capabilities of integrated environmental-economic accounting are currently limited, one has a clearer sense of his preference for pursuing a stress-response approach to an analysis of these complex issues that refer to concerns beyond economic performance and growth. He shows, however, that integrated accounting is capable of capturing direct environment-economy interactions in stress-response terms, facilitating a link-up with broader indicators of sustainable development.

Once the principle is accepted and the issue is established as an essentially economic lacuna, however, the task of the statistician is to determine the appropriate analytical structure (and related empirical framework) to be mapped onto the conceptual or theoretical model. From the outset it is also necessary to identify the value set for which that data structure is valid. The compilation of a relevant value set involves the careful selection of the pertinent quantities to be incorporated into the analytical structure and the assignment of applicable prices by which to weigh their relative significance. While there has been considerable convergence in recent years as to what quantities are relevant to an assessment of environmental change, there has been much less agreement on the choice of prices to apply. The basic problem, of course, is that the fundamental price structure underlying the conceptual coherence of the system of national accounts—which deals predominantly with current value flows—is not the same as that which is relevant to an evaluation of environmental conditions because the latter attaches overriding significance to the importance of stocks and future reserves of natural capital. A variety of approaches have been suggested, such as shadow prices, willingness to pay (effectively shadow prices), avoidance costs, defensive costs, abatement costs, and maintenance costs, each of which stresses a somewhat different principle. All valuations, however, are answers to different questions and each of the above contingent valuations suffers from some sort of drawback as a measure of environmental cost in maintaining human welfare intact.

Traditionally, environmental statistics have focused on the compilation of physical data. Investigators have tended to concentrate on the primacy of resource depletion concerns and have carried out assessments of the direct and indirect physical impacts of environmental degradation, perhaps to the exclusion of gaining a fuller understanding of the underlying factors that influenced such activities in the first place. The greatest attention therefore has been paid to the use, predominantly in the economic production of material goods and services, of nonproduced natural assets, most of which can be classified as scarce because they are nonrenewable and hence exhaustible. Using up these resources has had very clear direct, but sometimes less obvious indirect, effects on the environment and on the economy. More recently, researchers have been examining some of these issues through evaluations of the impact of production activity itself on the environment in respect of residual output, polluting effluents, waste generation, and energy losses. Approximate emissions coefficients and elasticities have been calculated in relation to different industrial sector outputs. David Wheeler’s work in the World Bank on constructing matrices of pollutants, effluents, and emissions associated with different forms of industrial output has been a pioneering effort in this regard. But perhaps the real question is how to link such emissions and unwelcome subsidiary output to the nature of the technology in use. Even dirty industrial activities like coal burning, as the Swedes have shown, can be turned into relatively clean activities.

There are in addition other “nonbenign” physical environmental impacts arising from development and production activity such as the construction of dams, roads, street lighting, and office blocks, which give rise not so much to pollution and ongoing waste disposal problems, but to other ecological and environmental changes that may impose costs on society. In this area, as elsewhere, the devil lies in the details, lending added emphasis to the need to pay close attention to sectoral data and keep track of the microeconomic policy decisions.

The question of how to identify the appropriate physical components of environmental change, however, is overshadowed by the valuation problem. Since the pricing issue is widely debated and well known (although the solution remains elusive), I will simply and briefly refer to some of the major concerns.

Overall Price Structure and SNA

The monetary value of the various components of the SNA is predicated on the assumption that the aggregates and their magnitude are the outcome of the operation of market forces and that individual component prices reflect relative scarcities in both the product and factor markets. But, even in the details of the SNA, most of the flows measured represent a consolidation of activities transacted under different price regimes and market interventions. In the national accounts, the self-selecting common numéraire to integrate quantities is (internal) market prices. In theory, prices (or average revenues) are related to a level of output where marginal revenues are equated with marginal costs. This represents the point at which, if marginal costs are rising, prices properly reflect relative scarcities in a fully informed, open, unregulated economic system. Prices therefore provide reliable and effective signals for efficient current resource allocation decisions and transactions. Unfortunately, when people rely on the efficient operation of the invisible hand in economics they rarely question whether it reflects a strong right hand wielded by zealots of a new American conservatism or the more malleable left hand of a revisionist British socialism. Nor indeed do they notice whether any fingers are missing on account of ill-considered interventions by well-meaning public officials intent on donating subsidies or other forms of support to their political constituents. Only rarely do policymakers search deeper and look at the underlying distribution of wealth, income, and power that helps determine the price structure, or acknowledge intergenerational factors shaping economic and social policy. Certainly, neo-Ricardians—with a Sraffian perspective of production in an environmental context—would have some difficulty in agreeing on the formation of appropriate prices in a nonmechanistic system.

Environmental versus Economic-Policy Boundaries

While in principle national economic policies are bounded within each respective country’s political territory, the impact of those policies and more general environmental effects are frequently felt outside. In transcending national boundaries, such factors cause shifts in relative values (and costs) as well as changes in prices. The example of extensive logging and consequent deforestation by one country, with its widespread ecological implications for neighboring countries, is especially relevant in this context.

Price Levels and Relative Prices

Recent research on international comparisons of output and expenditure, involving the calculation of overall and sectoral level purchasing power parities, demonstrates that clear and significant differences exist between countries not only in absolute price levels but also in their respective structures of relative prices. This makes it difficult to view various environmental trade-offs in a more scientific, institutionally independent, and structurally detached conceptual manner. What is perhaps more important, the variability in prices across countries at different stages of economic development underlines critical differences in the relative importance attached to the environment by the rich and the poor. The lower price levels in low-income countries demonstrate clearly why the poor are prepared to ignore environmental costs and to take the benefits of economic activity upfront. They would clearly prefer to draw on their private gains now rather than hold on for the prospect of some better collective world in the future, even when firms are forced to internalize their costs according to an existing price structure.

Sector-Specific Issues

In most countries, and particularly the resource-rich developing countries, the all-important production activity of resource extraction is not conducted by industries readily characterized by a large number of well-informed small firms openly competing with each other. In this market, the organizing hand is not only invisible, it is also far from transparent. Attaching values to the use of resources (or reserves) in this context, where the dominant firm may also be a key corporate player in an international market already subject to oligopolistic forces, may make little sense and not lead to optimal resource allocations, whatever time dimension is under consideration.

Internalized Cost

Price structures are a reflection of power systems as well as power systems in their own right. If current price structures, which do not take into account future losses and changes in the relative scarcities of available resources, are not somehow adjusted to reflect the true full costs of present economic activity, the use of those resources will remain suboptimal. A more realistic price structure that can reflect better the time dimension of productive activity would encompass prices more closely representing the present discounted flow of future income earnings from resource use, that is, if available resources are used up very rapidly now, their prices would be much higher in the future, making present prices appear far too cheap.

For these and other reasons, as well as in the physical environmental context, it is important not to view the market simply as an excuse for allowing governments to abdicate the responsibility accorded to them by popular mandate. Governments need to be concerned with ensuring a safe and comfortable future for all citizens, particularly the poor and weak, who have little economic voice. The government needs to intervene in the market because it has a clear responsibility to take into account the wider social and collective costs (which the government itself must usually meet out of taxpayers’ funds) to try and ensure, for public benefit, that existing prices reflect all costs of economic production.

These problems of quantification and the basic values attached to the numbers have led some to argue that the transient quality of human life and the impermanence of the world dominion cannot be properly captured within all-embracing statistical artifacts that do not intrinsically possess a common underlying value system. But a tentative path from craft and magical sleights of hand to more generally accepted and authentic environmental economic framework has been carved out by a few statistical Merlins assisted by pragmatic empiricists and other more adventurous numerologists (sometimes in admittedly rather free-form carnivalesque constructions). These models now need to be endorsed not only by the scientific virtuosi, but also by the policy gurus and cognoscenti in applied operational use.

For the present, however, the policy practitioners in the international agencies and at the country level have been unable to reach a firm decision on the need for environmental accounting and its analytical use.

There is consequently a need to break the present logjam of methodological debate. The question of whether governments should go for an environmentally adjusted set of national accounts (as Bartelmus recommends) or live with a satellite system in juxtaposition with the conventional national accounts (as Bloem and Weisman suggest) is more of a “horses for courses” problem than a “one-zero” acceptance/rejection issue. There is even room to settle astride a suitable saddle. Clearly, many key environmental issues with a large social payoff in low-income countries can be taken upfront without any strict accounting framework or huge outlays in cost. These issues include the provision of, and access to, safe water, efficient solid waste disposal, and clean sanitation. In 19th century Europe, irrespective of whether policymakers were humanitarians or utilitarians, such environmental requirements were considered basic rights, fundamental to human needs. Their provisions was part of the social overhead cost of building a more cohesive and civilized society.

In terms of action by the international financial institutions, the present position would argue forcibly for the adoption of an essential practical initiative on the part of the World Bank to select perhaps as many as a dozen developing countries where prima facie environmental issues seem important, and seize on the “big ticket” items of resource depletion and ecological deterioration to assess their significance for future development. This would be in preference to trying to take a more comprehensive (but still incomplete) view of the environment as has been attempted in the United States and Norway. But the key is to strengthen individual countries’ own capacity to carry out such adjustments to their standard accounts on a regular basis.

For the Fund, ongoing concerns with the impact of structural adjustment programs with their emphasis on output growth (and hence more extensive input use) and the need for sound and sustainable macroeconomic policies will remain of overriding interest. But a more holistic view of development, guided by environmental accounts, could open up the possibility of a review of where so-called green taxes could be applied in certain sectors to achieve a more balanced and rational pattern of progress.

Other Discussion

Mohamed El-Erian: It is clear from just listening to the two papers that we should go quickly to the world of second best and try to come up with some views as how best to approximate, to use Michael Ward’s words, an appropriate methodology, an appropriate implementation strategy, and derivation of appropriate policy implications.

Salah El Serafy: I have worked for a long time trying to get economists to appreciate the fact that the economic aggregates being measured may not be the right ones. Environmental changes that are actually marketable and that have prices should be integrated in the national economic accounting system. One can draw a comparison between integrating the environment in the national accounts and Pigou’s approach to economic welfare. Pigou realized that economic welfare is only part of human welfare and that economists can deal with only those aspects that can be measured by money. Hence, the economist’s function differs from the environmentalist’s function, and I would like to particularly see an improvement in the way we look at economies that depend fundamentally on natural resources.

The new SNA and its extension to satellite accounts are perhaps the proper way to proceed, and as Michael Ward has rightly said, putting a value on the stock and adding it to national income may not be the best way of approaching the environmental change. I continue to believe that it is idiotic to think that when you discover some oil, you add it to national income, and then when you have extracted the oil, no change should take place in the economy. It is well known that the U.S. administration was very sympathetic to having green accounts, but has given up the initiative because of the controversies they caused.

I do not blame the revised UN national accounting system, which is essentially a compromise, under which, when new mineral finds are discovered, they can be allocated to some mysterious reconciliation account (which is devoid of significance). I believe that we need six months to a year to discuss the various methodologies, and I am delighted that the IMF has brought experts together to start a constructive discussion.

Knut Alfsen: There are many ways of valuing environmental resources and natural resources. No system can give all the answers. So, one should keep in mind the sort of questions one wants to address. The development of national accounts or of integrated national accounts should all be demand driven: one must focus on the questions the politicians and the decision-makers really want to address. From that, one should be able to fashion the sort of tools one needs, the sort of models or other analytical techniques one needs, and it is from these that one should be able to derive the sort of data one needs. So, the determination of statistics and the data is really the very last step in this process, and one should not start a discussion by focusing on the data.

Ian Johnson: As to the shadow prices of exhaustible resources, the methodological hurdles are not so great, and we really could do a much better job of coming up with economic costs and associating them with a depletion premium. The problem, I suspect, lies in the political consequences of looking at exhaustible resources and asking the authorities to charge shadow prices reflecting the true economic costs of, say, water. That is going to be a bigger hurdle than the methodological one.

Mohamed El-Erian: It seems to me that our speakers need to address four general questions. The first question relates to the value of the selective approach that says, “Let’s be selective, especially where it matters.” Second, should we rely on demand-driven effort for data generation? Third, is the binding constraint methodological or does it have political implications? Fourth, are the SNA satellite accounts the right way to approach the issue?

Responses

Peter Bartelmus: Let me start with the first question. The selective approach is selective in the sense that we focus on the most important issues in, say, green accounting. I believe it is not a correct approach. When we at the United Nations did our country projects, we had many surprises. Things that looked irrelevant in physical terms became very relevant in monetary terms. And even things we suspected were irrelevant in physical terms became, after some research, relevant. We should not simply do things because in the first meeting a few experts said this was important and that was not important. Of course, we have to be selective in terms of countries, and Michael Ward was correct on this.

The demand-driven effort would be the ideal approach, but the problem is that the demanders are usually inarticulate. They cannot say what they really want, especially in relation to a complex subject such as integrated accounting. Furthermore, if we permit people to ask questions, they will surely come up with very many questions that can become a clear impediment to standardization. I believe we must aim at standardization.

As to the satellite approach, except for the extreme green and the extreme brown people, I believe there is a consensus that parallel systems should be developed. Conventional economic accounts serve the medium- and short-term purposes of measurement of economic performance and they do it rather well, so one need not overburden them with controversial valuation and estimation methods. So, for the time being, the consensus is to let the two systems, environmentally adjusted national accounts and conventional national accounts, answer somewhat different questions—one long term and the other short term, one focused on environment-economy integration, and the other on the whole range of macroeconomic policies.

To provide Salah El Serafy the rationale for the reconciliation accounts, a number of impacts on the environment and on natural resources are not based on economic rationales and economic decisions, such as effects of natural disasters, natural growth of resources, and replenishments in the wilderness. Their discovery is something quite different from the creation of these resources. They are not produced. This is why noneconomic activities that affect natural resources have been separated from other activities that are part of the economic decision-making process. And they are put along with other volume changes, not reconciliation accounts (that’s a new terminology).

Paul Cotterell: We would agree that there is a strong case for selective approach in terms of the countries as well as the timetable of all the issues that one needs to address. We cannot address everything at once—issues such as resource depletion should be dealt with first—and on a priority basis. The Fund position on a satellite approach is quite clear from the paper.

As regards the question of being demand driven. While we all agree with it, the problem with national accounts is that a variety of users have a variety of needs, which we cannot meet all at once. This is part of the reason, and Peter Bartelmus has already said so, that a satellite approach is needed as an adjunct. There are obviously a number of methodological and practical issues that we do need to work on, but that should not stop us from progressing as well as we can with the available data and available understandings.

On reconciliation accounts, I find the comment by Salah El Serafy a little amusing, because if you do not put the new discoveries into reconciliation accounts, and you do not put them in income and production accounts, where do you put them? Not all reconciliation comes from the transactions and flows in the core of the accounts. Some comes from other sources. One of the reasons for not wanting to put the addition to natural resources into income, it seems to me, is that it is in reconciliation. There may be a better way of doing this in terms of the satellite accounting for the environment, but I do not quite know yet what it is, and this issue, I think, needs some further work.

David Reed: It is only appropriate as we move to the closing sessions of the seminar that we give our attention to how to push ahead in this area. In the Bloem-Weisman paper there is a reference to a conference that is being organized by the European Parliament. In fact, it is being organized by World Wildlife Federation, and is cosponsored by the European Parliament, European Commission, and the Club of Rome. I would like to point out that a similar conference will be held in Washington at the beginning of October 1995, and its focus will not be on EUROSTAT/European community per se, but rather on international financial institutions, the Bank, the Fund, and United Nations agencies.

The conference will cover a period of reflection, as Salah El Serafy has suggested, there will be a selection of 10 to 12 countries in a pilot phase, as Michael Ward has suggested, and there will be application of various methods included in the SEEA to those pilot countries; an assessment, derivation, and conclusions from those experiences; and a proposal of a more ambitious implementation plan. I am glad to say that the response from the Bank has been positive and negotiations are moving forward. I hope that the response from the Fund will also be positive.

Further Discussion

Naheed Kirmani: I am interested in knowing how Fund economists going out in the field, having to do their balance of payments analysis, and trying to churn out medium-term scenarios, can use the discussion on green accounting. Forgetting about all the controversies on methods and statistics, supposing the statisticians gave us a perfectly agreed set of national accounts, where environment was fully taken into account, would it really make a fundamental difference in the aggregate advice that the Fund would give or the components of that advice? For example, would we, having the new set of data, be in a position to advise a country to appreciate or depreciate its currency? Similarly, would the advice on the components be any different? Would we be advising the country to expand its budget or follow a contractionary policy? This is the sort of practical question that would help the economists in the Fund to realize exactly what the implications of green national accounts are.

Salah El Serafy: Perhaps I can attempt to answer this question. Given our state of knowledge, the satellite accounts are the proper place where we should attempt to make the adjustments, because it hurts to use the economic accounts, since the economic accounts are wrong! When Peter Bartelmus tells us, that we should be happy with the conventional calculations of GDP, I think it is wrong. The GDP is based on the fundamental concept of value added, and selling assets, as some countries do, does not create value. The method is thus wrong, totally, conceptually, and practically. And then, not only is GDP wrong, the saving is wrong (as David Pearce said earlier), the investment is wrong, the current account of the balance of payments is wrong, and all these clever calculations about the incremental capital-output ratio are wrong. We cannot get a good measure of whether a country is growing or is simply selling its assets. When a country is selling its timber, or selling its petroleum and mineral resources and overfishing its stock, to say that it is growing is wrong.

Kirit Parikh: I might be echoing what others have said. I am still not clear in my own mind the direction in which we should proceed to develop our estimates. I do recall, following the Pigouvian tradition, that Samuelson, in one of his articles, mentioned that an indicator useful in a production sense would not be useful in a value sense. So, in terms of future development (i.e., where we should be going in terms of our estimates?), I would like to know what direction we should follow. Are we going to attempt to develop value indicators or are we going to develop production indicators?

Michael Ward: I really have only two comments to make. First, on reconciliation accounts, the rationale, of course, is that we simply need a catch-all, jumbled-up residual, which it is. The degrees of freedom in the reconciliation accounts in the SNA, of both the quantities and the prices, are so wide that I do not think you can really make head or tail of them. In theory, you can, but my suspicions are that nobody is going to calculate them.

On valuation of assets, the separation between asset change and the price change, I think, is going to be very difficult. In relation to this, and coming back to the point about shadow prices, what concerns me most is that you have a structure of market prices (internal domestic prices), which in some sense are not the valid prices. If you think of prices as the present value of some future discounted income stream, you have to think of them in a broader sense than the purely domestic economy, because environmental issues are much broader than the context of the specific economy, or at least some of them are.

On the specific point made about Fund policies, I detect a conscious and commendable attempt during the last few years to rethink Fund strategy on fiscal policy and its impact on poverty and its fiscal policy advice and its impact on environmental concerns. The two are closely interlinked.

We heard arguments from Gandhi, McMorran, and Hansen this morning that economic growth and economic stability are key to improving the environment. These arguments were persuasive because they also addressed policy failures and the issues of the generation of material well-being. But my problem is that if your structure of prices reflects a given pattern of purchasing powers in an economy, and growth is a reflection of rates of return on capital and rates of return on labor, then it does matter very much (in terms of its impact on environmental issues) where you are getting your economic growth from.

Final Responses

Peter Bartelmus: The point made by Salah El Serafy that natural-capital consumption needs to be incorporated is incontestable; this is why we do integrated accounting. On the other hand, we should not overlook that the conventional national accounting system has been and continues to be a valuable information system measuring what is actually going on at the microeconomic and macroeconomic levels. Individual corporations, in most cases, do not yet account for resource depletion and for environmental degradation. There are exceptions, of course, and some corporations do account for natural resources if they own them, and some corporations have also started accounting for liabilities from pollution. (To the extent that these result in actual accounting at the microeconomic level, I suppose macroeconomic accounts would indeed incorporate these values.) In the meantime, the system still measures economic transactions and the financial flows behind them, while avoiding any imputations. I say this as an environmentalist at heart, that for the short-term measurement of economic performance, conventional economic accounts still have a very valuable role to play.

I share concern with everyone who believes that the attempt to introduce physical indicators into monetary accounts would overload the system. Can you imagine the impact of environmental statistical systems on national accounts, if, for instance, pollution from emissions and in concentration, contamination, and health indicators were all to be allocated to the different sectors? I do not think we yet have a feasible information system for doing this. The solution of the Netherlands was to create indices, and in producing indices that contributed to many political themes they avoided the overload. But they introduced another arbitrariness, by weighting a number of things together as contributors to a particular problem, such as global warming.

Paul Cotterell: I want to reemphasize that we should not be trying to make the national accounts the catch-all for everything to meet all sorts of needs and policy requirements, but rather that we should be developing particular systems that answer the particular questions being asked.

Note: Adriaan Bloem (Division Chief) and Ethan Weisman (Economist) are in the Real Sector Division of the IMF Statistics Department. The opinions expressed in this paper are those of the authors and not necessarily those of the IMF. The authors express their gratitude to Paul Cotterell, Michael Ward, and the other participants at the seminar for their useful comments. Of course, the authors are responsible for any errors that remain in the paper. Paul Cotterell presented this paper at the seminar.

1

“… physical data and accounts need to be established first. Monetary data could then be established as a second step” (United Nations, 1993, paragraph 390).

2

The 1993 SNA has recently been published under the auspices of the IMF, the OECD, the United Nations, EUROSTAT (the statistical bureau of the European Union), and the World Bank.

3

In the UN Handbook the use of input-output techniques is contrasted to the SEEA, which “should avoid data that are the result of modeling” (United Nations, 1993, paragraph 302). However, this does not seem consistent with SEEA’s commitment to monetization that, as will be discussed in the next subsection, also implies modeling.

4

For instance, it can be debated whether the willingness-to-pay prices that individuals claim in surveys would be affected if these individuals actually faced these expenditure decisions in reality.

5

Adherents of recording the depletion of natural resources as depreciation of capital point to the vast resources that are used over an extensive time period, while proponents of recording depletion as a use of stocks point out that the natural resources are actually used up while a capital good should, through maintenance, stay intact during its lifetime apart from normal wear (see El Serafy, 1991a).

6

Another problem with inclusion of nonmonetary elements is that they elude measurement (in part because they are not reflected in actual prices). Currently, the national accounts include some nonmonetary elements, such as owner-occupied housing and food production for own consumption; however, in most countries these elements are not large enough to disturb the use of national accounts data for economic policymaking. On the other hand, inclusion of elements such as unpaid household labor would change the national accounts aggregates substantially. For instance, a 1992 study by Kazemier and Exel for the Netherlands indicated that, if unpaid household labor would be valued at a minimum wage level, equivalent GDP would be 25 percent higher than standard GDP.

7

Norway also provides some interesting lessons. Interested readers may wish to consult the papers and references contained in this volume.

Note: The discussion was chaired and moderated by Mohamed El-Erian.