Environmental AccountingWhere We Are Now, Where We Are Headingby Joy E. HechtInterest is growing in modifying national income accounting systems to pro-mote understanding of the links between economy and environment.The field of environmental accounting has madegreat strides in the past two decades, moving from arather arcane endeavor to one tested in dozens ofcountries and well established in a few. But the ideathat nations might integrate the economic role of theenvironment into their income accounts is neither aquick sell nor a quick process; it has been underdiscussion since the 1960s. Despite the difficulties andcontroversies described in this article, however, inter-est is growing in modifying national income account-ing systems to promote understanding of the linksbetween economy and environment.Why Change?Governments around the world develop economicdata systems known as national income accounts tocalculate macroeconomic indicators such as grossdomestic product. Building a nation’s economic use ofthe environment into such accounts is a response toseveral perceived flaws in the System of NationalAccounts (SNA), as defined by the United Nationsand used internationally. One flaw in the SNA oftencited is that the cost of environmental protectioncannot be identified. Consequently, money spent, say,to put pollution control devices on smokestacksincreases GDP, even though the expenditure is noteconomically productive, some argue. These criticscall for differentiating “defensive” expenditures fromothers within the accounts. Also misleading is the fact that some environmen-tal goods are not marketed though they provide eco-nomic value. Fuelwood gathered in forests, meat andfish gathered for consumption, and medicinal plantsare examples. So are drinking and irrigation water,whose sale prices reflect the cost of distribution andtreatment infrastructure, but not the water itself.While some countries do include such goods in theirnational income accounts, no standard practices existfor doing so. When nonmarketed goods are includedin the accounts, they still cannot be distinguishedfrom those that are marketed. Valuing environmental services such as the water-shed protection that forests afford and the crop fertil-ization that insects provide is difficult. Though someexperts call for their inclusion in environmentallyadjusted accounts, typically neither the economicvalue nor the degradation of these services is includ-ed. On the other hand, however, the alternate goodsand services needed to replace them—water treatmentplants, for example—do contribute to GDP, which canbe rather misleading. Still another problem is that national incomeaccounts treat the depreciation of manufactured capi-tal and natural capital differently. Physical capital—abuilding or a machine, for instance—is depreciated inaccordance with conventional business accountingprinciples, while all consumption of natural capital isaccounted for as income. Thus the accounts of acountry that harvests its forests unsustainably willshow high income for a few years, but will not reflectthe destruction of the productive forest asset. Whileopinions 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 toalert policymakers to the broad role of the environ-ment in the economy, for example, comparing con-ventional GDP with environmentally adjusted GDP, orconventional savings with so-called “genuine” savingsthat account for environmental factors. Both of theseindicators can provide valuable warnings of theimpacts of environmental degradation on an economy. However, such flags are less useful in determiningSPRING 1999 / ISSUE 135 RESOURCES 14RESOURCES FOR THE FUTURESPRING 1999 / ISSUE 135 RESOURCES 15the source of environmental harm or identifying apolicy response. For this reason, many economistsplace primary importance not on the bottom line, buton the underlying data used to build environmentalaccounts. These data can help answer such questionsas how natural catastrophes like the fires that raged inIndonesia in the summer of 1998 may affect economicgrowth, or how environmental protection policiessuch as green taxes may affect the economy. Who Is Doing This? Environmental accounting is underway in severaldozen countries, where bureaucrats, statisticians, andother proponents both foreign and domestic haveinitiated activities over the past few decades. Severalcountries have made continuous investments inbuilding routine data systems, which are integratedinto existing statistical systems and economic plan-ning activities. Others have made more limitedefforts to calculate a few indicators, or analyze asingle sector. Some of the earliest research on envi-ronmental accounting was done at RFF by HenryPeskin, working on the design of accounts for theUnited States.One of the first countries to build environmentalaccounts is Norway, which began collecting data onenergy sources, fisheries, forests, and minerals in the1970s to address resource scarcity. Over time, theNorwegians have expanded their accounts to includedata on air pollutant emissions. Their accounts feedinto a model of the national economy, which policy-makers use to assess the energy implications of alter-nate growth strategies. Inclusion of these data alsoallows them to anticipate the impacts of differentgrowth patterns on compliance with internationalconventions on pollutant emissions.More recently, a number of resource-dependentcountries have become interested in measuring depre-ciation of their natural assets and adjusting their GDPsenvironmentally. One impetus for their interest wasthe 1989 study “Wasting Assets: Natural Resources inthe National Income Accounts,” in which RobertRepetto and his colleagues at the World ResourcesInstitute estimated the depreciation of Indonesia’sforests, petroleum reserves, and soil assets. Onceadjusted to account for that depreciation, Indonesia’sGDP and growth rates both sank significantly belowconventional figures. While “Wasting Assets” calledmany to action, it also operated as a brake, leadingmany economists and statisticians to warn against afocus on green GDP, because it tells decisionmakersnothing about the causes or solutions for environmen-tal problems.Since that time, several developing countries havemade long-term commitments to broad-based envi-ronmental accounting. Namibia began work onresource