Lecture

Accounting for the environment: Examples

Lecturer: Dr. Justus Wesseler, Wageningen UniversityLiterature: Perman et al. (2003), Ch.18

Eric Neumayer: Resource accounting in measures ofunsustainability

Savings and investment play a central role in the economics of development, but the traditional measures in the national accounts ignore depletion of

environmental assets. To correct this, genuine saving is defined as net saving less the value resource depletion and the value of environmental degradation

Pakistan - Investment and Saving

0

0.05

0.1

0.15

0.2

0.25

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Sh

are

of

GN

P Investment

Gross saving

Net saving

Gen. saving 1

Gen. saving 2

Foreign borrowing

DepreciationDepletion

Degradation

The gross savings rate in any country is determined by a whole range of micro- and macroeconomic policies that affect savings behavior by individuals and institutions. In seeking to alter rates of saving, the questions for the policy-maker include:

• Is the level of government current expenditure appropriate and sustainable? Dissaving by the government sector depresses the aggregate saving rate.

• Does the tax system penalize or encourage saving? Consumption taxes, income taxes and payroll taxes all have different incentive effects for savers.

• Does monetary policy set positive real interest rates? Negative real interest rates are an obvious disincentive to save.

• Do government policies support a viable financial sector? This affects both incentives to save and the efficiency with which savings are channeled into investments.

% Energy cons. increase 1960-84 due to

Energy consumption per person

population income 1960 1984

Africa 33 67 6 12

Asia 18 82 8 20

South America 37 63 16 28

Europe 16 84 72 124

North America 51 49

Canada 164 286

United States 236 281

World 46 54 38 55

Source: Pearce & Warford 1993, Table 6-6

Human Resources

Produced

36%

Natural Capital44%

Assets20%

Human Resources

56%

Produced Assets

16%

Natural Capital

28% Natural Capital

17% Produced

Assets16%

Human Resources

67%

Raw Material Exporters(4.6% of world total)

Other Developing Countries(15.9% of world total)

High-income countries(79.6% of world total)

•Figure 2. Shares of National Wealth

Box 1. The Wealth of Nations ‘Back of the envelope’ calculations of the wealth of nations were presented in Monitoring Environmental Progress (World Bank 1995). By taking the present value of the stream of income generated over the expected lifetime of the current population, a crude total wealth measure for each country was derived. Separate estimates were made of the value of natural resources and produced assets, permitting the calculation of a value of human capital as a residual. While the resulting figures for individual countries do not bear close scrutiny, broad trends across regions and income categories can be seen, as shown in the figure below.

The basic message from this analysis is that development can be conceived as a process of portfolio management:

-> countries have a given natural endowment

-> that may be transformed into other forms of wealth;

->natural resource exporters aiming to develop their economies need to balance human resources and produced assets in this process of transformation.

What is remarkable about Figure 2 is that produced assets make up a near-constant proportion of total wealth across different country groupings. If there is a lack in developing countries it is in human resources.

Percent of all DALYs in each country group

Environmental Health Group

SSA India Asia & Pacific

China MNA LCR FSE EME All LDCs

Water supply and Sanitation

10 9 8 3.5 8 5.5 1.5 1 7

Vector diseases (malaria)

9 0.5 1.5 0 0.3 0 0 0 3

Indoor air pollution 5.5 6 5 3.5 1.7 0.5 0 0 4

Urban air pollution 1 2 2 4.5 3 3 3 1 2

Agro-industrial waste

1 1 1 1.5 1 2 2 2.5 1

All causes 26.5 18.5 17.5 13 14 11 6.5 4.5 18

Table 1. Burden of disease from major environmental risks

Note:

• GS is a broad measure for weak sustainability

• positive GS is a necessary but not sufficient condition for sustainability

Considering the problem of resource depletion and environmental degradation, persistently negative genuine savings rate must lead eventually to declining well-being (World Bank).

Extended GS II as used by the WB:= GD investment - net foreign borrowing

+ plus net official transfers+ education expenditures- depreciation of man-made capital- resource rents from the depletion of natural resources

- damage cause by CO2-emissions as a proxy for other pollutants

Source: Neumayer, 2000.

Source: Neumayer, 2000.

World Bank method:

P: resource price

AC: average cost of resource extraction

R: resource depletion

Repetto method:

D: discovery

El-Serafy’s method:

r: discount rate

n: number of remaining years of the resource stock if production was the same in the future as in the base year

Reasoning for El-Serafy’s method:

-> receipts from non-renewable resource extraction should not fully count as ‘sustainable income’ -> extraction leads to lower resource stock -> depreciation of the resource capital stock -> receipts form the stock will end at some finite time, ‘sustainable income’ by definition must last for ever

‘sustainable income’ is that part of resource receipts which if received infinitely would have a present value equal to the present value from the finite resource receipts.

The PV of resource receipts RC at the discount rate r over the expected life-time n of the resource stock is equal to:

1

0

11

1

11 11

nn

ii

rRCRC

rr

0

111 1

1

ii

SI rSI SI

rrr

Setting the two equations equal and solving for SI:

1 1

1 1

1 1n nRC SI RC P AC R

r r

The correction term, representing the user cost or the depreciation of the resource stock, would be:

1

11

1nSI RC

r

The ‘El-Serafy’ method does not assume efficient resource pricing according to Hotelling’s rule (does not depend on an optimization process).

Source: Neumayer, 2000.

Source: Neumayer, 2000.

Source: Neumayer, 2000.