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148 8 SEEA – The System for Integrated Environmental and Economic Accounting
compensated are also inconsistent with market prices, the basic valuation principle of the national accounts. The inconsistency stems from the inclusion of consumer surplus in willingness to pay declared by individuals. Interview-based valuations also face problems of free-rider attitudes and consumer ignorance. These are the reasons why the national accounts do not consider welfare measurement as their main objective, and focus instead on the market values of goods and services.
A few environmental accounting studies applied contingent and related damage valuations with questionable results (Section 8.3). The original SEEA focuses, there-fore, on supply-side valuations, considering the use of welfare valuations as exploratory and experimental (United Nations, 1993). The SEEA-2003, on the other hand, deals extensively with CBA valuations, since ‘damage-adjusted income clearly says something about the country’s revenue-creation capacity under prevail-ing conditions’ (United Nations et al., in prep.). There is no explanation, however, how these conditions (including environmental ones) relate to production and income-generation capacities.
The practical solution for including environmental impacts in environmental accounting – beyond economic resource accounting – is, therefore, maintenance costing. ‘Costing the maintenance of environmental “capital” is the anchor, which prevents environmental accounts from drifting away into the realm of welfare measurement and analysis’ (Bartelmus, 1998).
8.2 SEEA Objectives, Structure and Indicators
In response to the above-mentioned criticisms of the national accounts, the original SEEA set the following objectives for greening the accounts (Bartelmus, 2001):
Segregation and elaboration of all environment-related flows and stocks of the conventional national accounts, including environmental protection expenditures as part of a broader concept of ‘defensive expenditures’
Linkage of physical with monetary environmental accounts and balances, with a view to overcoming the ecological-economic dichotomy
Accounting for the maintenance of tangible wealth by covering not only human-made but also non-produced natural capital and its consumption
Assessment of hitherto ignored costs of (1) depletion of natural resources and (2) impacts on environmental quality, in particular from pollution
Definition and measurement of indicators of environmentally adjusted product, income and capital formation, accounting for the costs of environmental depletion and degradation as capital consumption.
All these objectives cater to the overall goal of assessing the environmental sustainability of economic performance and growth. Figure 8.1 shows the accounting indicators as they emerge from their respective accounts. The figure elaborates on Fig. 7.4, which illustrated the basic approach of incorporating environmental assets and asset changes in the conventional national accounts.
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150 8 SEEA – The System for Integrated Environmental and Economic Accounting
8.2.1 Accounting for Sustainability
Chapter 7 discussed the linkage of physical and monetary accounts by extending the asset definition of the conventional accounts. Broader concepts of capital and national wealth are the results. Changes in these capital categories in terms of capi-tal consumption and formation may indicate compliance or non-compliance with minimum conditions for sustainable economic growth, i.e. capital maintenance (Section 2.2.3).
Accounting for natural capital consumption and maintenance expands the sustainability notion that is built into the conventional net indicators of value added, income and capital formation. In analogy to the wear and tear, i.e. the ultimate destruction, of capital goods in the production process, one can define natural capital depletion and irreversible degradation as the permanent loss of parts or all of natural resource stocks and waste absorption capacities. Accounting conventions thus clar-ify the contents of physical depletion and degradation as a process of natural capital consumption by economic activities – beyond regeneration and replenishment and excluding other non-economic impacts on natural capital. The regeneration of nature can be seen as a cost-free natural repair process, recorded outside the production and income accounts as other changes of assets (Section 8.1.1). In contrast, capital con-sumption creates a private cost of produced capital loss for the owners and a social cost of environmental depletion and degradation for society.
One could also see the non-sustainable use of a natural resource in production as the reduction of nature’s ‘inventory’ of (primary) materials. The SNA would treat the resulting negative change in the value of an inventory of goods as negative capital formation. The corresponding increase in intermediate consumption and its deduction in net value added would then obtain the same environmentally adjusted net indicators as the natural-capital-consumption costing of depletion. Since the loss of absorptive capacities is difficult to conceptualize as a decrease in the ‘inventory’ of environmental services, the inventory-loss concept is not further explored here.
As discussed in Section 8.1.1 and Annex II, the depletion value represents a loss in the income/value added generation capacity of a natural asset. Depletion cost allowances reflect therefore a weak sustainability concept, calling for the reinvest-ment of these allowances in any income-generating activity. At first sight, mainte-nance costing of environmental services, discussed above, looks like aiming at the preservation of environmental functions. However, the strength of sustainability created by such valuation and accounting depends, of course, on the actual use of the cost allowance. Investing in the restoration of depleted and degraded natural capital would indeed reflect strong sustainability. If such use is not possible because of ‘complementarities’ in capital use (Section 2.3.1) or is ignored, investing in any other income-generating source would cater to weak sustainability.
Ultimately the strength of sustainability depends on (1) actual cost internalization or absorption (e.g. by governmental eco-taxation) and (2) on the actual use of the cost allowance made or tax revenue obtained (cf. Section 13.3.3). Given that such cost inter-nalization or absorption did not actually take place, it is probably safe to interpret the adjusted accounting aggregates as indicators reflecting potentially weak sustainability.
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Attempts at accounting for other non-produced capital categories, in particular human and social capital, have not reached the same levels of conceptualization and measurement as natural capital. Treating education expenditure as capital formation (as in the genuine savings indicator of the World Bank: see Section 8.2.2) is problem-atic. Education has benefits of private consumption, and health expenditure would also have to be considered as contributing to human capital formation and mainte-nance. Furthermore, the notion of human capital ‘consumption’ as a cost of a produc-tion process is not very enticing. Even more difficult is the measurement of social capital, i.e. social coherence and networking within a more or less ‘civil’ society.
At least for now, definition, measurement and valuation problems consign human and social capital accounting to research rather than recurrent accounting. One should not forget, though, that determining natural resource rent by deducting the earnings of produced capital from gross operating surplus generates a residual, which includes, besides natural capital, other intangible influences on corporate earnings and profits from production. Note also that assessing the role of financial wealth in contributing to the sustainability of economic growth needs still further clarification in analysis and accounting (see Box 8.3, below).
8.2.2 Environmentally Adjusted Macroeconomic Indicators
Figure 8.1 illustrates how the inclusion of natural capital consumption as environ-mental cost affects the main accounting identities. Most of the environmentally adjusted economic indicators can be calculated as sum totals and elements of the following equations:
Value-added identity for industry i:
EVAi = Oi − ICi − CCi − ECi = VAi − ECi (8.4)
describing Environmentally adjusted Value Added EVA generated by an industry i as the difference of its output O and cost, including intermediate consumption IC, fixed capital consumption CCi, and environmental depletion and degradation ECi
Net domestic-product identity for the whole economy:
EDP = ΣEVAi − ΣECh = NDP − EC = C + CF − CC − EC + X − Μ (8.5)
defining Environmentally adjusted net Domestic Product (EDP) as the sum of environmentally adjusted value added of industries, with a further deduction of environ-mental costs generated by households EC .6 Alternatively, and as in the conventional accounts, EDP can also be calculated as the sum of final uses, including final
6 Deducting the (maintenance) cost of household pollution from NDP treats these emissions as negative production or natural capital consumption of a sector whose activity is otherwise limited by definition to (final) consumption.
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consumption C, Environmentally adjusted net Capital Formation ECF and the balance of exports X and imports M; ECF is defined as gross capital formation CF minus produced and natural capital consumption:
ECF = CF − CC − ΕC (8.6)
Supply-use identity:
O + M + EC = IC + C + EC + CF + X (8.7)
indicating that the supply of goods and services produced (O = ΣO), imported (M) and provided by nature (EC, valued at replacement cost) equals their use in intermediate consumption (IC, ΣEC) and final consumption (C, ΣEC ), capital formation CF and export X, with Σ ECi,h = EC
Asset balance:
OpSt + CF – CC – EC OC = ClSt (8.8)
explaining the changes in the value of stocks – from the beginning of the account-ing period (opening stocks OpSt) to its end (closing stocks ClSt) – as gross capital formation CF, produced and natural capital consumption (CC, EC), and other changes in assets OC.
Other asset changes play an important role in greening the conventional accounts. The SEEA shifts part of the ‘economic disappearance of non-produced assets’ as the depletion cost of natural resources from SNA’s asset accounts to the production accounts. This rejects the notion of somehow vanishing natural assets, as the responsible users of environmental source and sink services are charged with the cost of depleting and degrading these assets. All other asset changes remain outside the production accounts, since natural disasters, the creation of subsoil resources or unmanaged natural growth are not the result of an economic produc-tion process (Section 8.1.1). Such changes should not affect, therefore, the value of product, income and capital formation.
There is some controversy about accounting for natural resource discoveries (‘economic appearance of a non-produced asset’ in SNA terminology). US national accountants (Landefeld & Howell, 1998) argue that the discovery of subsoil resources turns them into ‘developed natural assets’. Consequently they account for discoveries as capital formation in the supply and use accounts, thus largely offset-ting their depletion.7 This argument ignores, on the one hand, that the SNA actually
7 Despite this ‘self-effacing’ treatment of natural resource depletion, the coal-mining lobby suc-ceeded in convincing the US Congress to suspend further work on green accounting for an exter-nal review by the National Academy of Sciences (NAS). As a result of this suspension, work on green accounting by the Bureau of Economic Analysis was effectively halted, notwithstanding the positive recommendations by the NAS panel (Nordhaus & Kokkelenberg, 1999).
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