High-level meeting: Realising the World We All Want (UN Headquarters, New York, 2nd April 2012)
Green accounting: balancing environment and economy
1. Paradigms and indicators
What is it ‘we all want’? Paradigms like human or sustainable development, the maximization of welfare or national happiness seek to capture our needs and wants. They are holistic and to a great extent nonmaterial; they are also hard to define, measure and implement. The commonly used national accounts focus therefore narrowly on observable market transactions and economic growth. Indicators of sustainable development, wellbeing, human development, quality of life or environmental sustainability seek to show that such focus is misleading. They attempt to combine selected concerns and statistics that are ‘representative’ of the broader paradigm.[i]
All indicators are therefore proxy measures for something bigger than what the underlying statistics suggest. The meaning and validity of the indicators need careful examination before using them in policy- and decision-making. For instance, some indicator averages give equal weight to unequal issues; other measures apply questionable values when attempting to price environmental impacts. It is not surprising that national statistical services are reluctant to include these indicators in their regular data collection programmes. Nor is it surprising that policy makers continue to focus on the economy and its established statistics and accounts. Much-criticized gross domestic product (GDP) embodies this focus.
2. GDP bashing is not the solution
The popular Genuine Progress Indicator (GPI) famously asked: ‘why is America down, when GDP is up?’[ii] Dismissing GDP out of hand might jump the gun, however:
- GDP was never designed as a welfare measure. It is simply the sum total of the value (added) of economic activities, defined and measured in the worldwide adopted System of National Accounts.[iii] The checks and balances of this system facilitate the quality control of the underlying economic statistics. Accounting equations also provide a transparent and systemic tool of aggregation for a multitude of economic indicators. As pointed out by the Stiglitz Commission: ‘GDP is not wrong as such, but wrongly used’.[iv]
- GDP bashing might throw out the baby with the bathwater, the baby being the national accounts and GDP the bathwater. The national accounts measure, among other (notably financial) transactions, the structure of economic production and consumption, unemployment, and the distribution of income and wealth. It is unrealistic to assume that such measurement can and will be done outside the national accounts, and without reference to the sum total of economic activity.
Seeing that the national accounts will not go away, why not go right into the accounts and adjust them? Policy makers should find it easier to accept a need for reorienting the economy when their main source of information tells them to do so. The price for this is, however, limited coverage: the national accounts include only those issues that can be readily observed, measured and valued. Contrary to other social, cultural or institutional concerns, the interaction between economy and environment is well documented. The original System for integrated Environmental and Economic Accounting (SEEA)[v] was designed to assess this interaction and to adjust key economic indicators such as GDP, capital and income.
3. Accounting for sustainability – a practical step toward redesigning the economy
At the heart of greening the national accounts is measuring the sustainability of economic activity. Considering the natural environment as capital allows accounting for nature’s (re)source and sink services like produced capital and its services. ‘Capital consumption’, i.e. the wear and tear of produced capital and the depletion and degradation of non-produced natural capital, indicates a loss of capital services and hence non-sustainability of economic activity. The purpose of accounting for the cost of capital consumption is to retain funds for replacing used-up capital.
Produced and natural capital maintenance is the accounting definition of the sustainability of economic performance and growth. It is a narrow but operational definition as it ignores other less tangible human, social and institutional capital categories. All these capitals have been called forth as ‘pillars’ of sustainable development. International organizations use the multiple-pillar argument to explain the connections between sustainable economic growth and development. UNEP’s ‘green economy’ report[vi] suggests that sustainable development can be ‘easily’ translated into economic well-being: maintaining the use of all capital categories supposedly maintains economic welfare, ‘now and tomorrow’. The OECD’s ‘green growth’ strategy[vii] is more concrete: greened economic growth, which maintains produced and natural capital, cannot replace sustainable development but is a ‘measurable … subset’ of such development. In both cases, sustainability, in terms of capital maintenance, looks like the anchor that prevents drifting off into difficult-to-measure realms of wellbeing or development.
Expanding capital accounting for the assessment of the sustainability of economic performance is the basic approach of integrated environmental-economic accounting. Measuring the costs of sustainability as produced and natural capital consumption allows their deduction from ‘gross’ indicators of economic activity, including value added, domestic product, income and capital formation. The results are, in particular, an Environmentally adjusted net Domestic Product (EDP) and Environmentally adjusted net Capital Formation (ECF).[viii]
A global application of the SEEA can illustrate the meaning of these adjustments and their results.[ix] Global environmental depletion and degradation costs amounted to about 3 trillion US dollars or 6% of world GDP in 2006. During 1990-2006, the world economy showed similar growth rates for GDP and EDP. For such short time periods, ECF paints, however, a better picture of the potential sustainability of economic activity: it indicates the capacity to produce new capital after accounting for the loss of produced and natural capital. Figure 1 shows large differences in the sustainability of economic growth for the world’s major regions and countries. Positive ECF in industrialized countries and China shows sustainable economic growth. Negative ECF in developing countries, notably in Africa, indicates that these countries have been living off their natural and produced capital base. Overall, the world economy appears to be sustainable, at least in terms of ‘weak’ economic sustainability.
Figure 1 Environmentally adjusted net capital formation (% of EDP)
Source: P. Bartelmus, The cost of natural capital consumption: accounting for a sustainable
world economy. Ecological Economics 68 (2009).
Weak sustainability maintains the overall monetary value of produced and natural capital. It implies that the different capital categories can be substituted in reinvesting for capital maintenance. This is the reason why some ecological economists prefer physical sustainability measures such as carrying capacity of territories or resilience of ecosystems to perturbations.[x] The complexity and large variety of ecosystems make it difficult to apply such ‘ecological sustainability’ at national or international levels.[xi]
The next step of actually redesigning the economy requires allocation of the environmental sustainability cost to those households and enterprises that caused environmental deterioration. Well-known market instruments can prompt economic agents into ‘internalizing’ these costs in their plans and budgets. The purpose is to make them change their environmentally harmful production and consumption styles. Delayed and weak responses might make it necessary to supplement market instruments with governmental rules and regulations.[xii] Integrated environmental-economic accounts can provide the benchmarks for evaluating the efficiency of sustainability policies. Greening the national accounts could be the key to unleashing the greening of the economy.
4. Further work
A number of open questions remain, among them,
- Valuation of non-market environmental services. Contrary to the original SEEA, the latest revision relegates environmental degradation and its monetary valuation to future research and ‘experimental’ ecosystem accounting.[xiii] Allowing only for the depletion of economic natural resources, which are already part of the national (asset) accounts, looks like omitting the environment from environmental-economic accounting.
- Satellite accounts. Agenda 21 of the 1992 Rio Earth Summit recommended implementing the SEEA ‘as a supplement to, rather than a substitute for, traditional national accounting’.[xiv] Satellite accounts leave the conventional accounts untouched, even if they ignore running down economic resource stocks of minerals, timber or fish in their indicators of economic performance. Should the conventional accounts adjust their economic indicators for natural resource depletion? Do we need a satellite of the satellite accounts to include environmental degradation in the SEEA? Will satellite accounts continue to be ignored by policy makers?
- Strong vs. weak sustainability. What is the significance of ignoring ‘critical’ (non-substitutable) natural capital in weak sustainability accounting and policy? How can critical capital be identified in the greened physical and monetary national accounts?
- Corporate accounting. Corporations have shied away from environmental (full-cost) accounting for their environmental impacts. Obviously, they prefer showing their expenses for environmental protection to explaining what caused the expenses. Can the national environmental-economic accounts serve as a model for corporate accounting? Can such linkage improve corporate social responsibility?
- Coverage of human, social and institutional capital. Capital ‘consumption’ of these intangible categories is difficult to imagine and even harder to measure in national accounts. Can particular indicator sets cover the use of intangible capital? Can they aggregate all capitals into holistic measures of sustainable development, wellbeing or happiness? This is an important area of further research. As we all know: non-countables count.
The first 1992 Earth Summit in Rio de Janeiro called for establishing the SEEA in all member States ‘at the earliest date’. The Johannesburg Summit in 2002 ignored green accounting and encouraged instead further work on indicators of sustainable development. One of the two main themes of the forthcoming Rio+20 Summit is ‘a green economy in the context of sustainable development…’.[xv] Hopefully this will put comprehensive environmental-economic accounting back on the international agenda of monitoring and implementing sustainable growth and development.
[i] See for a critical review of these indicators: P. Bartelmus, Quantitative Eco–nomics, How Sustainable Are Our Economies? (Springer, Dordrecht, 2008).
[ii] C. Cobb, T. Halstead and J. Rowe, If the GDP is up, why is America down? The Atlantic Monthly (October 1995). The GPI seeks to measure human welfare by adding the value of leisure and non-market production to, and deducting expenditures for mitigating environmental and social deterioration from, personal consumption.
[iii] European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank, System of National Accounts 2008 (United Nations, New York, 2009), online: http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf.
[iv] Report by the Stiglitz Commission on the Measurement of Economic Performance and Social Progress, Executive Summary (14 September 2009), online: http://www.stat.si/doc/drzstat/Stiglitz%20report.pdf.
[v] The 1992 Rio Earth Summit endorsed the original SEEA: United Nations, Sustainable Development. United Nations Conference on Environment & Development, Rio de Janeiro, Brazil, 3-14 June 1992, Agenda 21: Ch. 8, online: http://www.un.org/esa/sustdev/documents/agenda21/english/Agenda21.pdf. The SEEA has now been twice revised; its different versions are available on the website of the United Nations Statistics Division, online: http://unstats.un.org/unsd/envaccounting/seea.asp.
[vi] United Nations Environment Programme (UNEP), Towards a Green Economy, Pathways to Sustainable Development and Poverty Eradication (2011), online: http://www.unep.org/greeneconomy/GreenEconomyReport/tabid/29846/Default.aspx.
[viii] The forthcoming version of the – revised – SEEA refers only briefly to ‘depletion adjusted balancing items’ such as depletion adjusted value added and saving. The reason is the omission of environmental degradation (notably from pollution), which is expected to be discussed in future ‘experimental ecosystem accounts’ and ‘extensions and applications’ (see note xiii).
[ix] P. Bartelmus, The cost of natural capital consumption: accounting for a sustainable world economy, Ecological Economics 68 (2009). Data gaps and different cost concepts in the available data make this a rather rough first study of global sustainability.
[x] E.g. C. Perrings, Resilience and sustainable development, Environment and Development Economics 11 (2006).
[xi] For a further discussion of the concepts and measures of sustainability, see P. Bartelmus, Sustainability Economics, An Introduction (Routledge, forthcoming), online announcement: http://peterbartelmus.com/.
[xii] The green growth and green economy reports (see notes vi and vii) discuss both, market instruments of eco-taxes and resource use and pollution permits, as well as governmental regulation and support for innovation.
[xiii] The Statistical Commission, in its forthcoming February/March meeting, is expected to approve the central framework of the SEEA as a ‘statistical standard’, while leaving environmental degradation and sustainability analysis to further less binding technical reports (see note viii).
[xiv] See note v.
[xv] Rio+20, United Nations Conference on Sustainable Development (20-22 June 2012). Online: http://www.uncsd2012.org/rio20/objectiveandthemes.html.