Peter Bartelmus is honorary professor of the Bergische Universität Wuppertal (Germany). He holds a doctorate from the University of Heidelberg. He has been teaching economics of sustainable development at the Wuppertal and Columbia universities.
Quantitative Eco-nomics:
How sustainable are our economies?
Green accounting incorporates environmental assets and their source and sink functions into national and corporate accounts. It is the popular term for environmental and natural resource accounting. Corporate environmental accounts have not yet found wide application; proposed concepts and methods are similar to those of national green accounting and are not further discussed here.
Conventional national accounts largely ignore:
- new or newly observed scarcities of natural resources, which threaten to undermine the sustainability of economic performance and growth, and
- environmental degradation as an ‘external’ (social) cost of economic activity.
Further critique refers to a possible distortion from counting environmental protection expenditures as an increase in national income, despite the fact that such ‘defensive expenditure’ tends to maintain, rather than increase, the welfare of society.
In response, the United Nations issued in 1993 and revised in 2003 a handbook on a System for integrated Environmental and Economic Accounting (SEEA).
The approach: incorporating nature’s assets
Figure 1. SEEA flow and stock accounts. (Source: Bartelmus, P., 2001. Accounting for sustainability: greening the national accounts, in: M.K. Tolba (Editor), Our Fragile World, Forerunner to the Encyclopedia of Life Support Systems, vol. II. Eolss Publishers, Oxford, pp. 1721-1735.)
Figure 1 illustrates how the SEEA introduces nature’s environmental and economic assets and the ‘environmental cost’ of their degradation and depletion into the System of National Accounts (SNA). The asset accounts measure the value of opening and closing stocks of economic and environmental assets, and their changes during an accounting period. Changes in assets are brought about by the formation and consumption of produced and natural capital (assets) and other non-economic influences such as discoveries, natural disasters or natural regeneration. The latter, i.e. ‘other asset changes,’ are recorded outside the income and production accounts; these changes do not, therefore, affect the conventional indicators of cost, income, product and capital formation.
Aggregation and valuation
National accounting requires adding up inputs, outputs and environmental impacts, and combining them into environmentally adjusted (‘greened’) indicators. The SEEA uses both monetary values (prices, costs) and physical weights (in particular the mass of material flows) to this end.
Environmentalists criticize the use of market values for ‘pricing the priceless’ categories of nature. In their view, assessing environmental assets and their services in monetary terms ‘commodifies’ nature, whose intrinsic value should not be subjected to market preferences. They prefer measuring environmental impacts by physical indicators and aggregating material flows through the economy (‘throughput’) in material flow accounts. However, weighting nature by the weight of materials and pollutants assigns doubtful significance (in tonnes) to diverse environmental impacts such as the depletion of a timber tract, emission of a toxic pollutant or the extinction of a cherished species.
Case studies of green accounting applied market valuation mostly to natural resource depletion. In the absence of market prices for non-produced natural assets, natural resource rents earned by selling resource outputs in markets are used for estimating the net present value and value changes (notably from depletion) of an asset. For environmental degradation, maintenance costs of avoiding or mitigating environmental impacts can be applied. A few studies used damage valuations of environmental impacts. Such welfare measurement and valuation are characteristic of cost-benefit analyses of projects and programmers; they are not compatible, however, with the market pricing and costing of the national accounts.
Accounting indicators and sustainability
Adding up the rows and columns in Figure 1 generates most of the environmentally adjusted indicators. Net value added and its sum total, net domestic product, can be calculated by deducting intermediate consumption (inputs) and capital consumption from output. Further deduction of environmental depletion and degradation cost obtains Environmentally-adjusted net Value Added (EVA) and Domestic Product (EDP). The popular ‘green GDP’ accounts only for natural capital consumption, ignoring the depreciation of produced (’fixed’) capital. Subtracting both natural and produced capital consumption from capital formation obtains Environmentally-adjusted net Capital Formation (ECF). ECF, in particular, tells us if our economy has been able to generate new capital after taking total capital loss (depletion/consumption) into account. Total capital maintenance represents a weak sustainability concept as it implies substitution among different produced and non-produced production factors.
Material flow accounts cater to a different sustainability concept. They assess material throughput as an environmental impact or pressure (on carrying capacities) indicator. Dematerialization by reducing throughput to a desirable level is the ecological concept of sustainability. It reflects stronger sustainability, restricting substitution to materials covered by overall material flow indicators such as Total Material Requirement (TMR) or Direct Material Input (DMI).