Taking Stock of the Environment

by Tom Imerito

Although looking at natural resources in terms of dollars and cents may summon images of greed-mongering capitalists lighting cigars with hundred-dollar bills, in reality a failure to account for the financial value of a nation’s natural resources and environmental services unwittingly promotes the despoilment of the environment and retards the development of poor nations.

According to Kirk Hamilton, Chief Environmental Economist for the World Bank and co-author of the book, Where is the Wealth of Nations, green accounting is known formally as Sustainable Environmental Economic Accounting (SEEA), an extension of the United Nations’ System of National Accounts (SNA), released in 2003.

“The regular system of national accounts (not green) is the key tool for finance ministries to determine the performance of a nation’s economy and what impact that may have on issues like inflation and unemployment,” Hamilton said in an interview. “What we are trying to do in greening the national accounts is fill in some of the things that aren’t in regular national accounts, and therefore are obscured when the finance minister is looking at these numbers, such as growth rates and savings rates.  If they don’t have relevant information on the environment and natural resources side they may have a very distorted picture.  A concrete example of that would be in countries that are producing minerals or oil, where natural resources are a very large part of the economy.  The finance minister would be looking at the national accounts and the savings rate would be say 20% of what’s being produced being saved for the future growth of the economy.  Environmental accounting might suggest that once you account for the depletion of the natural resources and wear and tear on produced capital goods such as buildings and machinery, the rate of creation of new wealth in net terms might be negative.  There can be a huge gap for some countries between the apparent rate of wealth creation and the true wealth creation, because the depletion is obscured by the regular national accounts. Green accounting will have the biggest impact on developing countries because these adjustments to the national accounts, relative to the size of the economy, can be proportionally much bigger in small countries than in large ones.”

For purposes of definition and simplicity, according to Where Is The Wealth of Nations: Wealth is the sum of income and production minus the cost of earning and producing – in other words, profits or savings. Natural resources come from the earth and they’re relatively easy to quantify, either before or after harvesting – things like minerals, timber and fishing grounds.  Environmental services come from the earth too, but they’re not so easy to count, and they are more noticeable for their absence than their presence – things like carbon-sequestration by forests, recreational activities from clean water, and robust fisheries due to good harvesting practices.  To simplify an extremely complex subject even further: Depreciation (wearing out), depletion (using up) and degradation (fouling up) count as minuses on the environmental economics balance sheet.  Remediation (fixing up) and discoveries (digging up) count as pluses.

Just as businesses routinely create economic pictures using accounts such as inventories, cash flow statements and balance sheets that show assets, liabilities and current balances, green accounting begins by itemizing both produced and natural resources and valuing them in monetary terms.  In the end, everything can be conveniently treated as part of a stock portfolio, with starting and ending balances for each account for each year.  However, once a method of accounting for a nation’s true wealth is put in place, it’s not long before the concept of sustainability raises its hand.

“One of the primary reasons for doing environmental accounting is to give us indicators of sustainable development; that is development where you can sustain human well being in the future,” Hamilton said.

But as attractive as the idea of green accounting may sound, a short history of the field shows, the task of weighing, measuring and accounting for both natural and produced wealth is often filled with contention.  The genesis of green accounting may be found in a string of conferences and declarations beginning with the 1972 UN Conference on the Environment in Stockholm, wherein the human right to an environment permitting a life of dignity and well-being was proclaimed.  Three decades hence, following a series of false starts, organizational lamentations, commission appointments, a 300-plus page report, President Bill Clinton’s support, Congressional disinclination to fund the system and a countervailing rave review by the National Research Council, the United Nations issued its formal recommendations for countries to integrate SEEA into their systems of Standard National Accounts in 2003.

When asked if all the countries of the world were committed to SEEA, Hamilton said, “I think so, with the exception of the United States.  It is a big gap to have the U.S. participating in the discussion, but not participating in the work.  The U.S. published its first set of environmental accounts about ten years ago and were basically told to cease and desist by Congress and have not been able to do any work since then.”

When contacted for an interview for this story, both the United Nations and the U.S. Department of Commerce declined to comment.  A spokesman for the U.S. Bureau of Economic Analysis said, “We don’t do that kind of accounting.  It may be unfortunate, but Congress doesn’t give us money to do it.  We just crunch numbers.”

A comment in the April 1994 Survey of Current Business, the monthly Journal of the Bureau of Economic Analysis may hint at the reason behind congress’s failure to act.  “…there is an expectation that such accounts will show that U.S. economic growth as currently measured is not sustainable because the stocks of natural and environmental resources that ultimately determine economic growth are unsustainable.  This expectation may well stem from focusing on depletion and degradation to the exclusion of additions.” (p. 48)

Perhaps.  But wouldn’t it be nice to know for sure?

This story first appeared in E- The Environmental Magazine.

©Copyright 2006 Thomas P. Imerito/ dba Science Communications

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