ENVR 115: SUSTAINABLE DEVELOPMENT Environment and Natural Resource Accounting November 27, 2007.

ENVR 115: SUSTAINABLE DEVELOPMENT

Environment and Natural Resource Accounting

November 27, 2007

Topics Covered

• National Income: Some Definitions

• Genuine Progress Indicator

• Expanding the Measure of Wealth

• Genuine Savings

• Human Development Index

• Value of Ecosystem Services

• Summary of Natural Resources Accounting

Costs of Monitoring

• The US currently spends $722 million per year on data collection for the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the US Census Bureau (not including the massive costs of the decennial census).

• A total of more that $4 billion is spent annually on statistical data collection and analysis by federal agencies.

• The current annual budget of $168 million for environmental statistics seem inadequate considering that the annual private costs of pollution are over $140 billion and that the government spends $500 million per year on environmental enforcement.

IMPORTANT TO GIVE THE YEAR AND THE

CURRENCY

Inflators, Deflators, and Exchange Rates

• For monetary calculations care should be taken to always date the currency in which evaluation takes place; use constant$ for evaluation in a particular year’s $, and current$ for $ in the current year; so we may be given the data that a project benefits are $100 million in constant 1996$, what would they be in year 2004$?

• Use a price index like the US. Dept. of Labor’s, Bureau of Labor Statistics which reports a value of 160.5 for 1996 and 188.9 for 2004 based upon a value of 100 in 1982-83. Therefore, the value of the benefits in 2004$ would be $117.7 millions ((188.9/160.5)x100).

• This price index can also work backwards as a deflator.

Sometimes the Values are based on different Currencies

• Conventional official exchange rates– Posted by governments

• Shadow pricing on exchange rates– Adjusted for distortions: real exchange rates

• Purchasing Power Parity (PPP)– Equalizes the purchasing power of different currencies

in their home countries for a given basket of goods• The Economist’s Big Mac exchange rate

– Based upon what the same commodity sells for in different countries, similar to PPP, but only for one commodity

www.x-rates.com/d/USD/EUR/graph120.html

www.x-rates.com/d/USD/EUR/graph120.html

Purchasing Power Parity (PPP)

The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the idea that, in an efficient market, identical goods must have only one price.

A purchasing power parity exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods. It is often used to compare the standards of living between countries, rather than a per-capita gross domestic products comparison at market exchange rates.

Source.Wikipedia

For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one United States dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity[1] — far closer than the nominal exchange rate that put one dollar equal to 7.6 yuan. This discrepancy has large implications; for instance, GDP per capita in the People's Republic of China is about US$1,800 while on a PPP basis it is about US$7,204. This is frequently used to assert that China is the world's second-largest economy, but such a calculation would only be valid under the PPP theory. At the other extreme, Japan's nominal GDP per capita is around US$37,600, but its PPP figure is only US$30,615.

An entertaining example of one measure of PPP is the Big Mac Index popularized by The Economist, which looks at the prices of a Big Mac burger in McDonald's restaurants in different countries. If a Big Mac costs US$4 in the U.S. and GBP£3 in Britain, the PPP exchange rate would be £3 for $4. The Big Mac Index is presumably useful because it is based on a well-known good whose final price, easily tracked in many countries, includes input costs from a wide range of sectors in the local economy, such as agricultural commodities (beef, bread, lettuce, tomatoes), labor (blue and white collar), advertising, is inaccurate in certain cases because of the different market rent and real estate costs, transportation, etc. The Big Mac Index conditions that exist in differing McDonald's locations. Although it is not perfect, the index still offers significant insight and an easy to understand example of PPP.

BIG MAC INDEX

SizzlingJul 5th 2007 From The Economist print edition

National Income: Some Definitions

Source: New Zealand Institute for Economic Research, www.nizeir.org.nz

GDP, or Gross Domestic Product, is a measure of how big an economy is. Nominal GDP is expressed in current prices i.e. in the common dollars that we all know and love. Real GDP is expressed in constant prices i.e. in the dollar values of a particular year, which is known as the base period. Most economic analysts focus on real GDP because it shows the underlying strength of an economy.

A common belief is that nominal GDP is the total value of all goods and services produced in a country in a particular time period. But this isn’t strictly correct. We have to adjust the total value of output – which is called gross output – to make sure we aren’t double counting.

For example, suppose a firm makes $100,000 worth of furniture in a year, but in doing this, it buys supplies worth $40,000 from other firms. Of the total sales of $100,000, the component that our furniture firm is responsible for – the firm’s value added – is $60,000. And this is what we want to include in GDP – the value added from each firm.

The goods and services that are purchased from other firms are referred to as intermediate consumption. So, summing over all the firms in the economy we have

GDP = gross output minus intermediate consumption

and it follows that GDP and value added are the same thing.

Now we can define GDP more formally: GDP is the total market value of goods and services produced within a given period after deducting the cost of goods utilized in the process of production.

Definition of GDP by Expenditure

• GDP = Personal consumption expenditures + Gross private domestic investment + Net export of goods and services + Government purchase of goods and services

Gross Domestic Product or Expenditure, 1930–2000 (in billions of current dollars)(GDP=GNP-net factor earnings from ROW, NNP=GNP-consumption of fixed capital)

Year/Item 1930 1940 1950 1960 1970 1980 1990 1995 1999 20001

Gross domestic product

$91.3 $101.3 $294.3 $527.4 $1,039.7 $2,795.6 $5,803.2 $7,400.5 $9,268.6 $ 9,872.9

Personal consumption expenditures

70.2 71.2 192.7 332.2 648.9 1,762.9 3,831.5 4,969.0 6,250.2 6,728.4

Gross private domestic investment

10.8 13.6 54.1 75.7 150.4 484.2 847.2 1,110.7 1,636.7 1,767.5

Exports of goods and services

4.4 4.8 12.3 25.3 57.0 278.9 557.2 818.6 989.8 1,102.9

Imports of goods and services

4.1 3.4 11.6 22.8 55.8 293.8 628.6 902.8 1,240.6 1,466.9

Government10.0 15.1 46.9 113.8 237.1 569.7 1,181.4 1,372.0 1,632.5 1,741.0

CPI 16.7 14.0 24.1 29.6 38.8 82.4 130.7 152.4 166.6 172.2

Limitations of real GDP as a measure of economic welfare:

• Only market activity is included in GDP• GDP places no value on leisure• GDP does not reflect improvements in quality• Environmental damage improves GDP• Ecological costs are not netted out of the GDP• Doesn’t account for population growth

Why Bigger isn’t Better: The Genuine Progress Indicator

Redefining Progress, Cobb, Goodman, and Wackernagel, Nov. 1999The Genuine Progress indicator (1950-2002): 2004 Update, Venetoulis and Cobb, March 2004

The following non-monetary benefits -ignored by the GDP- are included in the GPI

1. The value of time spent on household work, parenting, and volunteer work

2. The value of services of consumer durables (such as cars and refrigerators), and

3. Services of highways and streets.

The GPI then subtracts three categories of expenses that do not improve well-being:

1. Defensive expenditures, defined as money spent to maintain the household’s level of comfort, security, or satisfaction, in the face of declines in quality of life due to such factors as crime, auto accidents, or pollution. Examples include personal water filters, locks or security systems, hospital bills from auto accidents, or the cost of repainting houses damaged by air pollution.

2. Social costs, such as the cost of divorce, crime, or loss of leisure time.

3. The depreciation of environmental assets and natural resources, including loss of farmland, wetlands, and old-growth forests, reduction of stocks of natural resources, such as fossil fuels, and damaging effects of wastes and pollution.

See: Cobb et al. (1999) The Genuine Progress Indicator: Summary of data and methodology for discussion of the methodology of GDP.

Gini Coefficient (from Wikipedia, the free encyclopedia)

The Gini coefficient was developed by the Italian statistician Corrado Gini. It is a measure of the income inequality in a society.

The Gini coefficient is a number between 0 and 1, where 0 means perfect equality (everyone has the same income) and 1 means perfect inequality (one person has all the income, everyone else earns nothing).

While the Gini coefficient is mostly used to measure income inequality, it can be also used to measure wealth inequality as well.

The Gini coefficient can be further understood is calculated using areas on the Lorenz curve diagram. If the area between the line of perfect equality and the Lorenz curve is A, and the area underneath the Lorenz curve is B, the Gini coefficient is A/(A+B). This is expressed as a percentage or as the numerical equivalent of that percentage, which is always between 0 and 1.

A B

Quintiles

• Increased worktime means less time for leisure

• Increased work burden on women

(Graphic omitted due to space issues)

Growing Debt Finances Rising Consumption

Figure 3: What If the Past Had Been Different?

Combined effect of all three policies

GPI/cap

SAN FRANCISCO BAY AREA

GENUINE PROGRESS INDICATOR

VERMONT, CHITTENDEN COUNTY, AND BURLINGTON

GENUINE PROGRESS INDICATOR

Other Indicators of National Wealth

Where is the Wealth of Nations?

World Bank, 2005

Components of Wealth• Natural Capital

– minerals and fossil fuels

– timber

– non-timber benefits of forests

– cropland

– pasture land

– protected areas

• Produced Assets

– perpetual inventory model

– urban land fixed proportion of produced assets

• Human Resources

– present value of future income streams

GENUINE SAVINGS

Hartwick’ Rule• Hartwick's Rule [1977] defines, under certain conditions, the

amount of investment in produced capital (buildings, roads, knowledge stocks, etc.) that is needed to exactly offset declining stocks of exhaustible resources. This investment is undertaken so that the standard of living does not fall as society moves into the indefinite future. Solow [1974] showed that, given a degree of substitutability between produced capital and natural resources, one way to design a sustainable consumption program for an economy is to accumulate produced capital sufficiently rapidly so that the loss from the shrinking exhaustible resource stock is precisely countered by the services from the enlarged produced capital stock. Hartwick's rule – often abbreviated as “invest resource rents” - requires that a nation invest all rent earned from exhaustible resource extraction.

• A resource rent is the revenue yielded from developing a natural resource for example, from a piece of land in excess of that yielded by the poorest or least favorably located land under equal market conditions.

Based on http://en.wikipedia.org/wiki/Hartwick%27s_Rule

Human Development Index

Other HDIs are based upon Gender , Developing countries, and Industrialized countries.

Human Development IndexHD = f{longevity, knowledge, income}

Longevity = life expectancy at birth

Knowledge = 2/3(adult) + 1/3(mean years schooling)

Income = utility of income

Each factor is scaled by maximum and minimum

Value of the World’s Ecosystem Services and Natural Capital

The value of ecosystem services and natural capital, Costanza et al., Nature, Vol. 387, May 1997, pp. 252-260.

(17 services and biome components)

Biome Value $/ha/yr Total Global billion $/yr

Open ocean 252 8,381

Coastal 4,052 12,568

Forest 969 4,706

Grass/rangelands 232 906

Wetlands 14,785 4,879

Lakes/rivers 8,498 1,700

Desert 0 0

Tundra 0 0

Ice/rock 0 0

Cropland 92 128

Urban 0 0

TOTAL $33,268

(Range $16-54 trillion with average of $33. Current GNP $19 trillion.

Environment and Natural Resources Accounting

A Summary

Many different approaches to natural resources accounting. All require massive amounts of data.

All suffer from serious deficiencies, either conceptually or implementability (word?).

I like the Genuine Progress Indicator for the US. I have not seen it for other countries.

The World Bank’s Expanding the Measure of Wealth is very attractive--I like the conclusions--but it has some serious conceptual and data problems. The Genuine savings aspect of it is very appealing.

Costanza valuing ecosystem services at 1.8 times the current world GNP is a fascinating, but highly suspect figure.

There is a need for better ways of articulating overall states of the environment with an eye towards “sustainability.”

Atkinson, A. (1983) The Economics of Inequality. 2nd edition. Oxford University Press, Oxford. Cobb C., and Cobb J. (1994) The Green National Product. University of Americas Press, Lanham, Md. Cobb, C., Halstead, El, and Rowe, J. (1989) The Genuine Progress Indicator - summary of data and methodology. Redefining Progress, Washington, DC.Daly, H., and Cobb, J. (1989) For the Common Good - redirecting the economy towards community, the environment and sustainable development. Beacon Press, Boston. Goodman, A., and Webb, S. (1994) For Richer; for Poorer - the changing distribution of income in the UK 1961-1991. Institute for Fiscal Studies, London. Jackson, T., and Marks, N. (1994) Measuring Sustainable Economic Welfare: a pilot index for the UK 1950 -1990. Stockholm Environment Institute/New Economics Foundation, London. Jackson, T., Laing, F., MacGillivray, A., Marks, N., Ralls, J., and Stymne, S. (1997) An Index of Sustainable Economic Welfare for the UK 1950- 1996. Centre for Environmental Strategy, University of Surrey.Max-Neef, M. (1995) Economic Growth and Quality of Life: a threshold hypothesis. Ecological economics, 15, 115-118. Nordhaus W., and Tobin, J. (1972) Is Growth Obsolete? in Economic Growth, Fiftieth Anniversary Colloquium. National Bureau of Economic Research, Columbia University

Press, New York.