ERE13: Environmental Accounting

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ERE13 Environmental Accounting

• Criticism of current accounting conventions
• Extending national accounts
• Indicators to measure the state of the
  environment
• Sustainable income theory and practice
• Sustainability indicators
• Real practice
• Environmental accounting in Germany
• ESI and EPI

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Last week

• International Environmental Problems
• International externalities
• Optimisation analysis
• Game-theory analysis
• Acid rain
• Depletion of the ozone layer
• Climate change

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Why environmental accounting?

• There is growing concern about the impact of
  countries economic activities on the environment
• Continuing economic growth and human welfare are
  dependent upon the services provided by the
  environment
• Are environmental endowments being used
  responsibly?
• Is it a sustainable development?
• Statistical accounts could provide information on
  the interactions between the economy and the
  environment

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National Accounts

• National accounts have a prime role in evaluating
  the state of a country, compared over time and
  between nations, and in judging government
  policies
• National accounts routinely assess economic and
  social indicators
• Development dates back to 1940s/1950s when there
  was less concern about environmental issues

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Extending National Accounts

• Criticism of current accounting conventions
• Absence of any allowance for the depletion of
  natural resources
• Absence of any adjustment for degradation of
  environmental amenity
• Activity to offset environmental damage is
  counted as part of income
• With the increasing prominence of environmental
  problems, there is an increasing need to extend
  national accounts to include environmental
  indicators as well

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Environmental Indicators

• Indicators measure something in a simple,
  insightful and meaningful way
• GDP measures economic activity
• Income per capita measures welfare
• Literacy measures primary education
• Life expectancy measures health care
• As environmental problems are many and complex,
  indicators are many and not always to the point
• Indicators are often split in pressure-state-(impa
  ct)-response
• What is reported is the state of the environment

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Canadas Indicators
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Environmental Accounting Theory

• Consider a small economy with two stocks, capital
  and resources
• The sustainable path for this economy involves
  constant utility for ever
• What kind of economic behaviour is necessary for
  sustainability in this sense?

Welfare function
Resource stock
Capital stock
Production function
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Theory -2

• Consider the Hamiltonian
• Static efficiency gives rules for P and w
• Marginal utility of consumption equals the
  shadow price of capital
• Marginal product of the natural resource
  equals the shadow price of the resource stock

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Theory -3

• Consider the Hamiltonian
• Dynamic efficiency gives rules for P and w
• The growth rate of the shadow price of the
  resource equals the discount rate
• The return to capital equals the discount rate

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Theory -4

• Consider the Hamiltonian
• Use a linear approximation for U
• Then the Hamiltonian is approximately
• In the optimum

Environmentally adjusted domestic product
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Practice

• Gross domestic product is
• Total output sold measured by value added
• Total income earned
• Total consumption plus investment
• Net domestic product is gross domestic product
  minus depreciation
• NDP is the proper indicator but hard to measure
• UNSTAT proposal
• EDP NDP ED GDP D - ED

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Measuring the depreciation The net price method

• Environmental depreciation is the total Hotelling
  rent, that is, shadow price times stock change
• ED THC (P-c)(R-N)
• where P is the price of the extracted resource
  and N are new finds
• The marginal extraction cost c is unobservable,
  typically approximated with the average
  extraction costs
• Often N is ignored
• Liable to produce large year-on year fluctuations

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Sustainability indicators

• Pearce-Atkinson indicator of genuine saving
• This is the same as above, now expressed as
  changes, rather than levels
• Weaker forms of sustainability require that GS gt
  0, or perhaps GS 0
• Stronger forms of sustainability require that DN
  0

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Real Practice

• Most countries, however, use more pragmatic
  approaches
• Germany, for example, reports
• Resource use
• Emissions
• State of environment
• Size of environmental industry
• Expenditures on environmental protection
• A lot of work goes into improving and harmonizing
  environmental accounts

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Germany
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Germany -2
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ESI

• The ESI ranks countries on 21 elements of
  environmental sustainability for 146 countries
• The aim is to provide a policy tool, allowing
  benchmarking of environmental performance
  country-by-country and issue-by-issue
• The highest ranking countries in 2005 are
  Finland, Norway, Uruguay, Sweden and Iceland
• substantial natural resource endowments, low
  population density, and successful management of
  environment and development issues
• The lowest ranked countries are North Korea,
  Iraq, Taiwan, Turkmenistan and Uzbekistan
• many challenges, both natural and manmade, and
  have poorly managed their policy choices

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ESI -2

• Developed countries face environmental
  challenges, particularly pollution stresses and
  consumption-related issues
• In developing countries resource depletion and a
  lack of capacity for pollution control are
  dominant concerns
• Result No country is on a sustainable trajectory
• However, comparative policy analysis is difficult
• Many critical environmental issues are not
  measured in a usable way
• Problem of persistent data gaps
• Regional difference in quality of data
• This increases uncertainty

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EPI

• The Environmental Performance Index (EPI) is not
  an update to the ESI, but rather a new effort to
  gauge countries (133) against a set of 16
  specific environmental policy targets
• Measures how close each country comes to the
  goals
• The highest ranking countries in 2006 are New
  Zealand Sweden, Finland, Czech Republic, and the
  UK
• They commit significant resources and effort to
  environmental protection, resulting in strong
  performance across most of the policy categories
• The lowest ranked countries are Ethiopia, Mali,
  Mauritania, Chad and Niger
• These are underdeveloped nations with little
  capacity to invest in environmental
  infrastructure (such as drinking water and
  sanitation systems) and weak regulatory systems.

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Germany
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EPI (2)

• Again, a countrys wealth emerges as a
  significant determinant of environmental outcomes
  
• But again effective policymaking is critical as
  well
• At the same level of development
• Dominican Republic (54) significantly outperforms
  Haiti (114) even though the countries share an
  island
• Likewise, Sweden (2) produces much better
  environmental results than Belgium (39)
• Again, all countries face serious environmental
  challenges
• Limitations incomplete data excluded 60
  countries from the analysis