Environment Unit IV

8/2/2019 Environment Unit IV

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Accounting for the Environment (362-372)


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Introduction SNA devised by UN Statistical Office is not adequate

for measuring the impact of environmental changes onincome and wealth

National accounts governed by income and wealth

Externalities not included or given negligible value


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Criticism of the present system1. Include only man-made capital and ignore naturalcapital

e.g. fishing stocks, ores and minerals etc

2. National Accounts make no allowance for thedepletion of natural resources

Therefore, national accounts overestimates the true national

income

Latter should be treated as environmental degradation

3. Defensive expenditures are included but no allowancemade for corresponding environmental damage.


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Move towards Green GNP Formulate a separate system of environmental

accounts

It could complement conventional SNA Express stocks and flows in physical units

Annual publication

Used in Canada, US, Netherlands, Norway and France


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Environmental accounts and

Environmental IndicatorsIf an environmental change hasreduced the income of the affectedparties

Fall in income is associated with fall inconsumption levels

It would imply a loss in welfare (asperceived by economists)


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Environmental accounts and

Environmental Indicators Two issues are discussed in this section

How to express environmental changes in monetarymeans

Difficulties involved in it


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Monetizing is difficult Only some environmental changes can be captured

through market mechanism.

e.g. difference in house prices reflect the differences inthe perceived quality of local environment.


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Physical units vs Monetizing Physical unit measurement is dependent on the

environment good in question

No need of assigning monetary values in this case butaggregation is impossible

Units and different and no standard weighting systemin existence


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Stocks and Flows of Environment

Stocks

Opening Stock and closing stock representthe state of environment at the beginning

and end of the accounting period.

Flows Records the impact of actions of economic

agents on the environment.


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Stocks and Flows of Environment Both are possible for environmental goods. In some

cases stocks cant be inferred, only the flow can bededuced

Examples:

area of protected habitat

area of contaminated land

number of species in f lora and fauna emission of CO2 (only flow)


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List of Environmental Indicators OECD identified a list of 50 environmental indicators

to avoid omissions and unnecessary inclusions.

Canadian Environment Ministry also proposes a list 46 indicators proposed by UK


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Criteria of selecting the indicators

(UK) Time series data of indicator should be available.

Indicator should be sensitive to actions by the

authority Should allow the setting of meaningful targets

Data should be official

Data should not require much additional collection

and processing Indicator should be readily understood and considered

appropriate for audience.


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Suggesting a better measure: ISEWA single measure or index is desirable.

The Index of Sustainable Economic Welfare (ISEW) is

an example ISEW is calculated by adjusting the conventional

national accounts measure of personal consumptionexpenditure to take into account the environmental

costs. Only those environmental costs are included which

have a monetary value


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Integrating Economic and

Environmental Accounts (IEEA) Present Economic Accounting: Concepts

GDP: Value of final goods and services produced in aneconomy over the year

GNP: GDP + Net factor income earned from abroad

NNP: GNP - depreciation


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Integrating Economic and

Environmental Accounts (IEEA) Depreciation or depletion should be applied to natural

capital also

Marketed assets like farmland, forests, fishing stocks

Non-marketed assets like wildlife areas, rainforest

Some income is also kept aside to replace orcompensate for the depletion of the natural stocks.

This introduces the concept of sustainable income ortrue income.


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Sustainable Income: J.R. Hicks It is the maximum value that a person can consume

during a period and still be as well off at the end of theperiod as at the beginning.

It takes into account the depreciation of man-madecapital

Similarly, depletion of natural capital should be also be

included otherwise income will be overestimated.


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Three Adjustments to NIA Depletion of natural capital

Environmental degradation

Defensive expenditures

Lets consider each adjustment in detail..


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Depletion of natural capitalExample: A country is exploiting a non-renewable

mineral resource like oil or coal.

NNP = GNP Dwhere D is the depreciation of the man-made capital

Receipts from resource (R) are included in income butdepletion is not included

Two methods to include depletion

Depreciation Method

User Cost method


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Depletion of natural capital:

Depreciation methodValue depletion as that part of receipts from sale of the

resource which can be attributed uniquely to thatresource

If extraction costsis zero

R is attributable to depletion ofresources

NNP = GNP D - R

If extraction costsare not zero

R includes labour costs and returns toman-made capital (mining equipment

etc)

Depletion = Gross trading profitsfrom the sale of resources estimated

return on man-made capitalemployed in extraction of resources


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Depletion of natural capital:

Objections to depreciation method Under this method, measurement of GDP and GNP

continues to include receipts from the sale of naturalassets, thus, overestimates income from production.

If two countries are similar except that one hasabundant supply of a natural resource which isextracted at negligible cost. Though their GNPs willdiffer but not the NNP. The advantage of resource richcountry is not visible by depreciation method.


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Depletion of natural capital: User

Cost Method Receipts from the sale of a natural resource comprise

of two elements: capital consumption (user cost) andincome, depending on the level of reserves, currentrate of extraction etc.


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Share of true income in receipts from the naturalresource sales:

Where X = true income

R = net receipts from sale

r = a discount raten = number of years the current extraction couldbe sustained, i.e. exploitative reserves divided bycurrent rate of extraction


Cost Method


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Cost Method Complementary expression

L.H.S is the depletion share. It is inversely related to n(lifetime of resource) and r (the rate at which resourceowners discount future revenues)

If resource is abundant, n is large, R.H.S is small, X is closeto R.

N , X R (the current national income practice).


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Cost Method If society decides to lend considerable weight to the

consumption possibilities of succeeding generations,then r will be low.

R.H.S will be high

Share of income in receipts from sales will be relativelysmall.


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Cost Method Principle: From the receipts from sales of an

exhaustible natural resource, a certain proportion isset aside and invested at rate of return r in order to

yield the same level of true income X indefinitely.

It is consistent with the idea of sustainabledevelopment.

Combined capital (natural and man-made) issufficient to at least maintain the same rate of incomein successive periods.


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Depreciation method vs User Cost

Method (I) Depreciation method overestimates the depletion as

all oil and gas GDP is counted as depletion except thatportion attributable to labour or man-made capital

used in extraction.

User Cost method attributes an additional incomeelement to the natural resource sale, so that theresidual estimate of depletion is typically less.


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Using the depreciation method, the standard andconventional measure of GDP/GNP would beunaffected nut net measures will be reduced by the

amount of depletion.

In User Cost method, GDP/GNP would be redefined toexclude the user cost depletion estimates and hencewould be less than the conventional measurescurrently in use.

Depreciation method vs User Cost

Method (II)


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Depletion of natural capital: Special

cases Case of renewable natural resources: the level of

expenditure required to maintain capital (forsustainable income) can be calculated more directly as

the volume of replacement investment.

Case of natural resources which cant be monetized:depletion can be estimated using replacement orrestoration costs, or willingness to pay.


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Environmental Degradation Degradation decline in the quality of natural

environment.

There is no difference between this case and the earlier(depletion of mineral resources) but the practicalproblems are severe.


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Common approach establish certain desirablequality standards and measure degradation asdeviation from these quality levels. Value can be

achieved by finding the cost of making degradationgood or achieving the quality levels.

Set standards where

Marginal social cost of pollution = Marginal AbatementCost

Environmental Degradation


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Another approach: Use Willingness of Pay either toavoid the degradation or to make it good.

Value of degradation = Sum of the individual WTPbids

Disadvantage: WTP measure includes consumersurplus which is not having market priceand hence

overvaluation occurs.



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In addition to depreciation of man-made capital anddepletion of natural resources, the costs ofenvironmental degradation should also be deducted

from GDP/GNP to arrive at sustainable nationalproduct.

Implementation is difficult



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Defensive Expenditure Defined as the expenditure which are expressly

designed to protect the environment and to preventdegradation.

It is treated as expenditure in national accounts

Environmentalists argue that it should be excluded ordeducted from GDP based on the concept of

sustainable income.


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Difficult to measure indirect defensive expenditures

An alternative/ complementary measure should bedesigned rather than changing GDP.

Defensive Expenditure

Environment Unit IV

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