Environmental Accounting Where We Are Now Where We Are Heading by Joy E Hecht Interest is growing in modifying national income accounting systems to promote understanding of the links between economy and environment he field of environmental accounting has made Trather great strides in the past two decades moving from a arcane endeavor to one tested in dozens of countries and well established in a few But the idea that nations might integrate the economic role of the environment into their income accounts is neither a quick sell nor a quick process it has been under discussion since the 1960s Despite the difficulties and controversies described in this article however interest is growing in modifying national income accounting systems to promote understanding of the links between economy and environment Why Change Governments around the world develop economic data systems known as national income accounts to calculate macroeconomic indicators such as gross domestic product Building a nation s economic use of the environment into such accounts is a response to several perceived flaws in the System of National Accounts SNA as defined by the United Nations and used internationally One flaw in the SNA often cited is that the cost of environmental protection cannot be identified Consequently money spent say to put pollution control devices on smokestacks increases GDP even though the expenditure is not economically productive some argue These critics call for differentiating defensive expenditures from others within the accounts Also misleading is the fact that some environmental goods are not marketed though they provide economic value Fuelwood gathered in forests meat and fish gathered for consumption and medicinal plants are examples So are drinking and irrigation water whose sale prices reflect the cost of distribution and treatment infrastructure but not the water itself While some countries do include such goods in their SPRING 1999 ISSUE 135 RESOURCES 14 national income accounts no standard practices exist for doing so When nonmarketed goods are included in the accounts they still cannot be distinguished from those that are marketed Valuing environmental services such as the watershed protection that forests afford and the crop fertilization that insects provide is difficult Though some experts call for their inclusion in environmentally adjusted accounts typically neither the economic value nor the degradation of these services is included On the other hand however the alternate goods and services needed to replace them water treatment plants for example do contribute to GDP which can be rather misleading Still another problem is that national income accounts treat the depreciation of manufactured capital and natural capital differently Physical capital a building or a machine for instance is depreciated in accordance with conventional business accounting principles while all consumption of natural capital is accounted for as income Thus the accounts of a country that harvests its forests unsustainably will show high income for a few years but will not reflect the destruction of the productive forest asset While opinions vary on how to depreciate natural capital they converge on the need to do so Which Indicators Are Useful Some proponents advocate simple flag indicators to alert policymakers to the broad role of the environment in the economy for example comparing conventional GDP with environmentally adjusted GDP or conventional savings with so called genuine savings that account for environmental factors Both of these indicators can provide valuable warnings of the impacts of environmental degradation on an economy However such flags are less useful in determining RESOURCES FOR THE FUTURE the source of environmental harm or identifying a policy response For this reason many economists place primary importance not on the bottom line but on the underlying data used to build environmental accounts These data can help answer such questions as how natural catastrophes like the fires that raged in Indonesia in the summer of 1998 may affect economic growth or how environmental protection policies such as green taxes may affect the economy Who Is Doing This Environmental accounting is underway in several dozen countries where bureaucrats statisticians and other proponents both foreign and domestic have initiated activities over the past few decades Several countries have made continuous investments in building routine data systems which are integrated into existing statistical systems and economic planning activities Others have made more limited efforts to calculate a few indicators or analyze a single sector Some of the earliest research on environmental accounting was done at RFF by Henry Peskin working on the design of accounts for the United States One of the first countries to build environmental accounts is Norway which began collecting data on energy sources fisheries forests and minerals in the 1970s to address resource scarcity Over time the Norwegians have expanded their accounts to include data on air pollutant emissions Their accounts feed into a model of the national economy which policymakers use to assess the energy implications of alternate growth strategies Inclusion of these data also allows them to anticipate the impacts of different growth patterns on compliance with international conventions on pollutant emissions More recently a number of resource dependent countries have become interested in measuring depreciation of their natural assets and adjusting their GDPs environmentally One impetus for their interest was the 1989 study Wasting Assets Natural Resources in the National Income Accounts in which Robert Repetto and his colleagues at the World Resources Institute estimated the depreciation of Indonesia s forests petroleum reserves and soil assets Once adjusted to account for that depreciation Indonesia s GDP and growth rates both sank significantly below conventional figures While Wasting Assets called many to action it also operated as a brake leading many economists and statisticians to warn against a focus on green GDP because it tells decisionmakers nothing about the causes or solutions for environmental problems Since that time several developing countries have made long term commitments to broad based environmental accounting Namibia began work on resource accounts in 1994 addressing such questions as whether the government has been able to capture