Environmental Accounting

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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. T
he field of environmental accounting has made
great strides in the past two decades, moving from a
rather 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
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
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