Green National Accounting: Goals, Methods, and Practical

Solutions

Participants:

Robert Costanza, Max Ag~ler-o. Edward Barbier, Peter Bartelmus, Beatriz Castaneda, Gerardo Castro, Clovis Cavalcanti, Marcel Claude, Herman Daly, John Dixon, Salah El Serafy, Steve Farber, Monica Grasso, Kirk

Hamilton, Roefie H ueting, Mark Kenber, Ernst Lu tz, Manfred Max-Neef, Peter May, Hans Opbchoor, Olga Perez, Charles Perrings, Rodrigo Pizarro

DRAFT as of March 6, 1997

Do not cite or quote

- - , - - - - - - - -

There is fairly broad consensus that the current System of National Accounts

(SNA), used by almost all countries around the world for measuring their economic

performance, needs to be improved. Changes need to be made to account for the nonL

marketed services of the environment and the "natural capital" stocks which produce them,

among a host of other corrections (Bartelmus and van Tongeren 1994, Lutz 1993, van

Dieren 1995. Hamilton and Lutz 1996). But there is much confusion and disagreement

over both the appropriare "green accounting" framework itself and appropriate practical

methods for the valuation of ecosystem services within that framework. Appropriate policy

decisions depend on a clear understanding of the different goals being served by different

accounting frameworks. This paper attempts to clarify some of this c o n f ~ ~ s i o n by

describing the range of goals for green accounting and the corresponding frameworks and

methods which are. most appropriate for each goal.

Income vs. Welfare Fig~ire 1 and Table 1 lay out the range of goals and methods that are important in

green accounting. The fisst important distinction in goals is between economic income,

economic welfare, and human welfare. The first three columns in Table I refer to

econcimic income. W ~ I C ! ~ is a IneilSLlre of the production and use of goods and services.

Variations between ccjlu~nns 1-3 havc to do with how environmental services, natural

capital, and other non-nlnrketed items are dealt with. Figure 1 makes clear that economic

income is senerated fsom the stocl~s of both human-made and natural capital, and that this

income includes both n~al.~l<eted and non-marketed items. Service flows of freely provided

natural capital become i~icorportated into marketed gods and services, hence incomes, even

though the prices of these goods and services may not reflect natural capital scarcities.

But increases in economic income may not correlate with increases in economic

welfare, especially if the income measures do not adequately distinguish costs from

benefits. The fourth column in Table 1 attempts to look at not just how much income is

generated. but also at how much economic welfare is produced. As shown in figure 1,

these measures generally ~~cijust income to better reflect which items in the income measures

are costs and benefi~s. They do this by subtracting costs (such as natural capital depletion

and pollution). imputing values to missing benefits (such as household labor), and

adjusting for income dis~~.ibution effects using indices of income distribution.

L u l l C ; l ~ t ~ M , ~ L ~ I U V C I L ~ I I I J C I I J I ~ ~ I I w c l l c l ~ c , ~ I I I C C I I I ~ ~ I I Y IluIIiiln neeas are not relatea to

consumption of economic products or services. The fifth column looks directly at the

degree to which human needs are being met, the economic production involved being only

one of many possible nleans to that end. These distinctions are further elaborated below.

Measuring Economic Income Witllin the ecollo~nic incolnc goal, one can distinguish three sub-goals: marketed

income, weakly sustainable income, and strongly sustainable income. Column 1 deals

mainly with marketed goods and services and includes measures such as Gross National

Product (GNP) and Gross Domestic Product (GDP). GNP can be measured on either the

output or input side. It is either ( I ) the net flow in money terms from businesses to

households, governrnenl. investment, and the rest of the world, or, (2) the value added by

labor, govcrnment. resources. and profits. The definition of GNP has remained fairly

consistent o\>er the yea1.s and the long historical data record is a large part of its appeal.

GDP is GNP excluding production accomplished with foreign capital.

By subtracting clrpreciation of human-made capital from GNP one arrives at net

g' +'&tional prwluct (NNPI. As shown in Table I . NNP is usually defined by subtracting only 4 @ ;q; - p produced" capital drpl-cciation. If "non-produced"'capital depreciation (i.e. the marketed

, ' , # p1 timber valric of forest loss) is also subtracted then an alternate "environmentally adjusted

cc (-(:\ . version of N N P (1abelt.cl I\I'NP1 in Table 1 ) is produced (el Serafy 1989).

Weak v \ . Strong S~~slainability

Hou one deals with the .ru.stoirzabiliry and .rubstitutubility of natural capital is the

second majol distinction within the economic income measures. Weak sustainability refers d

to maintaince of the total capital stock, which implies a high degree of substitutability k MZS = L between hul-rlan-made :~nd natural capital (Costanza and Daly 1992, Pearce 1993, el Serafy oCrqw 0 j

(~;hhb\'k'P'\/1996). Strong susta~nabllity presumes limited substitutability between human-made and

A,, c/M3t'= natural cap~la l and ~Iier-efore requires the maintaince of both types of capital stock s d 9 605- *Keparately. Strong su51.ninability implies that at least some natural capital is essential and 3sjSt , b r c t m i - 4 cannot be s~~bstituteci for. In Table 1 both versions of sustainability imply (in addition to r? (bc& ( L u n l k t .

the adjustnlents alre~~cly discussed for NNP) a broadening of the basic framework to

include non-marketed soods and services produced by natural capital. Column 2 (weak

s~~stainahil i i~i) i m n l i ~ \ \ i ; l l ~ ~ i n o thpcp <PI.\I;PPC n c v l ~ r n i n m thpxr r o n he r ~ r h r t ; t ~ . t ~ r l h.r h ~ r r n n -

1 / 1 1. *̂ .. ...-- -.-.. -..- - -. .

Accounts (SEEA - 13clstelmus 1994) are both measures which account for weak

sustainability. This implies valuation using the cost to return the natural capital to its

original conclition <tIuc:ing 1989). The Sustainable National Income (SNI - Hueting 1995).

and some \w-sion.; o i the SEEA incorporate this perspective. We will return to these

valuation isqires la~er .

Measuril~g Ecol~omic Welfare Colunln 4 of l'able I moves from the goal of economic income assessment to the

goal of economic well'iire assessment. 'This goal is more complex and requires clearly

distinguishi~lg between costs and benefits - a task which is not always easy. Nordhaus and

Tobin (1972) proc!uced an early version of this kind of indicator in their Measure of

Economic Wclfare (MEW). MEW starts with GNP and makes three types of adjustments:

"Reclassific:~tion of G X P expenditures as consumption, investment, and intermediate;

imputation ('or the sei-v~ces of consumer capital, for leisure, and for the product of

household \rL.ork; correction for some of the disamenities of urbanization" (Nordhaus and

Tobin 1972. 11. 5 ) . S L ) I ~ ; C expenclitures are regrettable necessities rather than contributions

to welfare. MEW sub~l.ircts thc c o s ~ s of commuting to work, police services, sanitation

services. ~ .c , ; r c l main~en;ince, and niilional defense from GNP. All of these costs lead to

increases i l l GNP but 111cy do not Incan t h a ~ more human wants are being satisfied. MEW

then makc:, ; ipprop~ia~c 111lputations for capital services. leisure, and nonmarket work.

Finally, ME\/\/ recogniz~b.; that there are negative "externalities" connected with economic

growth and ! l~at thexe a1.Y [nost appal-cnt in urban life. "Some portion of the higher earnings

of urban rexidents may be simply compensation for the disamenities of urban life and

work. If so we s h o ~ ~ l d not count as a sign of welfare the full increments of NNP that result

from movi~is 3 man fronl farm or small town to city" (Nordhaus and Tobin 1972, p. 13).

But MEW does not include any ad.justments for environmental costs or

distributional effects. Daly and Cobb ( 1989) developed an Index of Sustainable Economic

Welfare (ISEW) which takes the MEW as a starting point, but incorporates the

environmental and disr~.ihutional issues that MEW ignores. To summarize these changes,

ISEW:

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includes 1nol.e th:111 econorinic inco~ilz by adding the other three elements, it is still based on

"means" a>,sessmc;it. Manfred M;i?c-Neef ( 1992) has developed a matrix of human needs

and has begun to ;lcltirehs well-bein; 1'1-om the "ends" perspective by involving people in an

interactive d ~ a l o g ~ ~ c to pel-form a I-1111nan Needs Assessment (HNA). The key idea here is

that huma~is iio n ) I I~a\:r primary nccds for the products of the economy. The economy is

only a means to 1117 enif. The end i., [he satisfaction of primary human needs. Food and

shelter arc ways oi' sa~ibfying the need for subsistence. Insurance systems are ways to

meet the nerd for psotecr ion. Religion is a way to meet the need for identity. And so on.

Mas-Neei' ;nm~~ial-izes as:

"Havins estai>li\heecl ;I diflesence between the concepts of needs and satisf ies it is

possil>le lo s t<~ l e twii liostulate.\;: l'il'st, fundamental human needs are finite. few and

classil'iable; .;ccond. ! 'undamrn~i~l Ii~11n~un needs (such as those contained in the

system ~:i-(>pc:hct.i ~11.c ~ l l e salnc in all cultures and in all historical periods. What

change>. both o\ l i ' l . !lllie and ~Iirc~i~gh cultures, is the way or the means by which the

needs ;IJ .L sat15 i'icd 1 jlp. 199-200 I"

T h ~ h I S a :I:I! cii i I t,rcnt co~li.cplu;~I f~.amework from columns 1-4 of Table 1 . which

assumes ~ l i a ~ I I L I ~ ~ ; : ~ 3c>, 1 1 cs are inl'r n !LC a11cI that, all else being equal, more consumption is

always ber:~.;.. A;\:;~r.iii ny LO this ai rc.snative conceptual framework, we should be directly

measur in~ iiow u c.11 I X I . ~ I L . humall 11icil~ :Ire bcing satisfied since overall human well-being

and consu~ilprior: :ise necessa~.i!)/ correlated and may in fact be going in opposite

directions.

Valuation :,f Ecosystem Services Ah ~ntiica~::ti in 'I":~l>le 1, the appropriate valuation methods for ecosystem services

are directly 1elatt.41 l o illc goals o n e is pursuing and the basic framework of the accounting

system. Colum~i I ~ . e l l e mainly on market values (including some "imputed" market

values. for cuaml>le illc I-cntal vnluc of owner-occupied housing). Columns 2-5 go beyond

market vi~luc> and I - ; I I S ~ . 11i;lny comlilcs non-market valuation issues. The basic framework

of Table I l1e11ss ra so1.t out sollle of ~ h e s e issues. Weak sustainability implies

substitutability be~jveen ~ ~ a t u r a l and human-made capital and thus can rely on fairly well

developed "willingness-[()-pay" baseci methods of non-market valuation.(e.g. Mitchell and

Carson 19XIC). Costa~iza c ~ . al. 1989. Dixon and Hufschmidt 1986, Barde and Pearce 1991,

Aylward ancl Ba[.l~izr 1002, Pearce 1993, Goulder and Kennedy 1996). These largely

include [lie estinla~ion oi (a) PI-e\,entive/mi~igative expenditures for health effects and

changes i n productivity 01' produccd mi rlatural assets (b) hedonic approaches of assessing

propertyllancl value changes due to cilanges in productivity and environmental quality; (c)

travel cos! (~ricrcasi.) due to enviro~imental deterioration and (d) contingent valuation .-

sample sul-veys of pi-ef~.rc~ices for e~i\:ironmental goods and services (Dixon et al. 1994).

Stsong s~rslainabili ty brings up other valuation issues however, and implies

differenr ~al i~ar ion 11~r1io;lh.

Substitutable vs. Essential Sel-vices A 1.;~) distiricli~~i. 11s we li:~\;e already mentioned, is the degree of substitutability of

natural v h . Ii~~rnan-11iacli.c capital. I 1 sonic nalural capital provides essential, irreplaceable

services i l l i i ~ e t 'u i~ct ior~ir :~ of ttie ov~.r.all system, then trade-offs are inappropriate, as is

reliance on hypo~1ictic:il 11:arkets in a:hich to evaluate these trade-offs. In these cases more

"objective" \::iluations ~ . h ; ~ t use ckiniage f~~nct ions to assess the physical damage caused by

offendins ~i<~\ivitich mil). more ~ppropriate. These include direct measurement of the

effects i l l 1 ci:i.)svhtc:ii ,cr vices pr-ocli~ction and the replacement and restoration costs of

maint.ai~~i~i;i rilebe \ ~ I . V I C : ~ . I ~ . FOI. e.xa[nl)le, Figure 3 represents such a damage function,

showing ; L (I;!-eshoid \\.i:cl.e inci-ea:,cd Impact causes rapid loss of ecosystem services.

Under thcic: . I > S L I I ~ I ~ I ~ O ~ ~ S . ,ome L I I . ~ I ! ( : [ h ~ ~ t the value of the service can be roughly estimated

as the c o ~ t i t I i.e~uln I r io :ipproxili~::!:.ly 100%: of ils function. These valuation techniques

make up I.~IL, l1i111, 01' tilt inethocis ; ( ) I - r~on-~na~.ltel valuation that go into the Sustainable

National 11:c.orn~. ; SN I ) !Ileasur.c: : . ~ ~ r r ~ r l l l y being developed by the Dutch Bureau of

Statistics !,I lacling I C)80. i 995).

Dialogue, Consenzsus Building, and Valuation C o i ~ ~ ~ n n s 1 2nd 5 o f Table 1 . which attempt to measure welfare, incorporate all the

previou!, \ ~ ~ ~ l u ~ ~ t i o r : ~ n e ~ h o d s where appropriate, but also need to bring in an element of

dialogue anit conselihu.; I~uilding. The xepnration of benefits from costs and means from

ends thar il1c3c mea\LIrcs I equire 11i\:olves some "arbitrary" elements and cannot adequately

take place wr[liour ,ci~ilc itiscu~sii)r~. The method of "constructed preferences" (Gregory et

al. 1993) i x one esan~ple . where people are not presumed to have well-formed preferences

for many cn\.i~-onnicniaI I'LI nctions ~ 1 1 ~ 1 1 1 . Rather, their preferences must be "constructed" in

an intesacti \ ;: ~sJoI.I<:I.Io~I ii:tting \ ~ , h i i : h exposes them to both scientific information about the

i l l i c l a C L i \ ~ C L O I I > C I I \ L . I . \ I J L I I I C I I I I ~ U I L L I C ~ ~ L I L . ~ IULU.)QU ~ 1 1 1 V V L L U L yb\IyIC. ., LUV Ul.u .." .. .. -.. they are bei~ig Inel.

Practical Limitations, Case Studies, and Uncertainty Sevci-;II coun~~.ies :trountl the world have begun implementation of various versions

of the indiciirors mcntioncd in Table 1 . The ISEW has been calculated for the US, the

UK, thc Nc~11ierlanc.l~. !?ustri;~. Gesniany, and Sweden. The UN's SEEA is being

implemcnrccl in sr\:el.:il iountrics including Mexico, Chile, Papua New Guinea, Japan.

Korea, Ind(.~:lcsia. C'oli~~~il>ia, l'liaila~id. the Philippines, and Costa Rica. In addition to

conceptual Il~clltel..;, p ~ . ~ ~ c : ~ c a l l i~ll i la[ion~ and dala availability limit what can be done. In

Chile, as i l l I ) I lies C O L I I I I irjc'., where t l i ~ S EE.4 is bcing implemented, the program consists of

four coixl?o~-;i~n~s: ! I j cic;~!ion o l ~nan-made ~ ln t l natural capital balance sheets; (2) creation

of matrlcc?; $ . t i c n \ . ~ ~ . o ~ ~ r ; ~ ~ i ~ i a l es~cr'r:.aillrcs of economic activities and mitigation costs; (3)

identificatic t r i ( ~ i ' c l i . i t ~ i I \ .: expend11 LI : .L \ ; and (-4 j economic valuation of natural resources

and the en\,: I :11lnic;.l-1i. 111 I ! : 21 itnpie11 lell[:itic?n Soc~ised on the forestry, mining and fisheries

sectors. 7'11~.,-~~: thl-ce t x i c li-s accounl tor 50% of' total exports, 34% of which are mineral

exports. ~ t r i i i !oger:icr l i l ~ ' \ * . conl~.~bu!e 10%. to total value added (Claude, M & Pizarro. R.

1995). Iniliiii dat;~ rll: the <.hangcs i n the volume of native forest indicate that Chile has lost

between 30(.~.000 ii~!il \)0(;.000 iu. of' narive fosest in the period 1985-1994 due mainly to

the substi!~l: lo~l oi' i ~ l ~ ~ ~ ~ p e ~ i l ' ~ : ~>li~l;tations i)f' pine and eucalyptus for native forest,

clearing l'o~. : , : I - ~ ~ L ~ ~ I L I I . : ; . ii!..l fire\. The n:ilivr fo~.est is expected to be completely depleted in

20-25 ye;ll. I i curl.c.~l [ ! I C I 1 ~ 1 s con[ inue. E\ ,cn this sclatively straightforward physically-based

resource ah:\i..ihnlenr c,;i:~!..;.d sonll. n.-alor shake-ups. largely because it exposed information

about deple!~i)n TJIC' , , 1 ' 1 ;larive I '~)L.CSIS. which wo~lld affect exports of forest products to

developecl i : ~ l l n t l - l ~ ~ ~ . '1 :;z inctic.atori in Table I involve more controversial valuation

ass~~mptio~l . > ~ n d ~~ncev!:~!:i[ies arid will he even mure difficult to implement in the existing

institutioni~l e l tin; ol' ii.l;:ny colulltsleh. What is needed are clear goals at the policy level

taking accolillt of [he cli>!inctio~ls in Ti~ble I , and a much more collaborative approach

which can involvc ~ I I I I I ? C rnm;ljol. ~li l l i~llolder gl.oups in a truly "integrated assessment"

(Costanza ; i r ~ c l Tognrrii 1996). This approach can illuminate and communicate the huge

uncertainties involved. 1.a11ier than ig~iosing them. and ultimately can help to build a broad

consensus ;ri,o~~t llir go;ils ot' grcen accounting, the appropriate data collection and

valua~ion ri~c~l?otls. ;lricl :IIL. pracric.al sreps towal-d implementation.

By ;.il.:xlying rllc l.iillge o l possible goals for green national accounting against the

various f r~ i .~ :~wol . i i> ;Inti valua~ion techniques which have been suggested, we have

hopefully clar.il'ied lli~li:ll the confus~on over these issues. All of the goals listed in Table

1 ace imporr~iiir. b~it O H C l!iLlst be clear about which goal one is pursuing. Economic income

measuses c~un certai:ll! i-)u impl-~\~ecl. and sorne ~11-gue that this should be our first priority.

As one mo\c'\ 10 11lc risl!~ i n 1:ihle I , [he sugsested changes become more controversial

anil ancertalj!. hu: ;~ l \o . Iij:lny M 11~ild 111,gue. IIIOSC relevant. We can make better decisions

about our cui.i.cnt stdru., :,lid ~ L I ~ L I I . ~ directions as a society using the whole array of green

accounting iriciicaroi.~ lih~ccl in Table I i l l an informed and intelligent way, being fully aware

of the range of goals, ~i~c,!hods, :rnd practical solutions. It must also be remembered that

national incornc, ncco~.i~lr;rlg itself is only a static and retrospective picture of where the

economy hax been. 11 :nLl,t be w e d i n conjunction with Inore prospective techniques like

cost benefit iin~llysi5 ai;ll iivnami; n-loileling in order to make intelligent choices about our

conilnon fiit L I I . ~ .

Acknov-ledplzir nts This :,:;ll,rl' ;i ;I !;I ;.luct . . ) I a u ; ~i.l;sIiop Ilcl(i at the World Bank in Washington DC,

Ma1.cl1 20-32. 1990 ' i ' , ~ , . : /ork,~l!op \L :I.. Joirilly \~>olisored by the International Society for

Ecological E ~ ~ i ! i ~ ~ i l ~ ~ i : I ~ I : Inificcl~ol'> ;111d E~i\/il .olli~~ei~al Valuation Unit of the Environment

Del);!rtment . ) ! the 'A'; :! !. . B;lrlI,. 1112 U n i vcrsity of Maryland Institute for Ecological

Econdrnicsl :!\ i th f ~ ~ r ; : l i , l ; ,irppo~.i h-cil;~ [he MacXrthul- Foundation.

h'i,~! keted \\ r,tk Strong t ~ ~ b i 1 1 Sustainability

G o a l I?co~)omic Economic Inc , )me Welfare

Basic Framework

Human Welfare

value of marlie~ed gooti5 and sesviccs psocl~ii.ed and con>;!lncd i n an t.c tinomy

1 + 11011- 2 + preserve value of the ~n;u.kt.~cd essential wefare effects goods we lid natural capital of income and sei.vicc\ other factors C ~ I ~ S L : I ~ I ~ I L I O I I (including

distribution, household work, loss of natural capital etc.)

No n - Gh'? en\ ironmentall \ . (Gri~k ' < L ~ ~ ~ o ~ ~ : ~ l

adjusted P S O C I I I . :

measures GI);' ,Groi . 1 )olnc\lic Prod~i.:: 1

Env~~.onmental!y N N .'I adjusted (Nel ~ . ! i ~ o n : ~ t mellsures Proilt~,: ~nclutl~ng

n o n - ~ I I ~ ~ l u c e i l assel; .

MEW (Measure of Economic Welfare)

S N I ISEW 1 Sc~.sra~nable (Index of Nauonal Income) Sustainable

Economic SEEA welfare) (System of E ~ ~ v ~ r o ~ ~ l n e n t a l Economic Accounts)

assessment of the degree to which human needs are fulfilled

HDI (Human Development Index)

H N A (Human Needs Assessment)

Appropriate Marlier values 1 + 2 + 3 + Valuation M: 111 i n~nes s Replacement Constructed Methods ro Pay Rased Costs,+ Preferences

Values i see Production . > 1 ~iblc. 5 J Values

4 + Consensus Building Dialogue

Erosion control Local flood reduction Regulation of s t re~~~nflows

Cleansing air and w,lter !r:\tlt. off games, cost effective analysis, i~l~!:lzement cost

Species p~.o~cction

Economlc Adjustments Income to Income Account

Economic Welfare Account

>-made ~ i ta l ;ical +

Presumed Correlation

4- - +

L 4

Marketed Income

- - - - -

Non-Marketed Income

Services &

Materials

Figure 1. Distinctions between economic income, economic welfare, and human welfare.

ian)

ural ~ i ta l

dire assess

of the d, to which needs arc

fulfill r - costs of natural capital depletion. pollr~tion, etc.

k dislribution effects

+ imputed values lor household labor, etc.

Hum Welfr

Assess

r

indices of the

net value of economic income

Netherlands

OGNPlodu 0 Ism lmex

Austria

Price (S)

0% I

%Resource Remaining I I

Sustainable standard

AvailabiIity of environmental function

Verlag. New Y ,.!! I \

Lurz. E. (ed). 1993. To\., ;ll-d impro\lc.!l ;~(c:)ilnling for the environment. The World Bank, Washiiigton, DC'.

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