EC O L O G IC A L E C O N O M IC S 6 1 ( 2 0 07 ) 61 1 –6 12
a v a i l a b l e a t w w w. s c i e n c e d i r e c t . c o m
w w w. e l s e v i e r. c o m / l o c a t e / e c o l e c o n
COMMENTARY
Comment on environmental accounting
Robert Repetto
Yale University, School of Environmental Studies and Forestry,
New Haven, CT, 06511, United States
Glenn-Marie's invitation reminded me that it's been 20 years
since my colleagues and I published some of the earliest
empirical studies integrating natural assets into the system of
national accounts. Those studies revealed that
a. About half the rapid GDP growth in Indonesia in the years
prior to its economic collapse represented natural resource
depletion. Net capital formation was unsustainably low —
even negative in some years.
b. The “debt crisis” that beset Costa Rica and other Central
American countries could equally have been called a
“natural resources crisis” because as external liabilities
increased, domestic natural resource assets that generated
the income and exports for debt service declined at an even
faster rate — without a trace in the economic accounts. The
IMF monitored the external accounts but there were no
natural capital accounts to monitor.
c. Anomalies in the treatment of natural capital in the
economic accounts were contributing to policy confusions
and errors in countries largely dependent on natural
resources, especially the confusion between increases in
national income and declines in national wealth.
Those and similar findings and underlying conceptual work
led to a broad effort to change the SNA in 1993 to treat natural
capital on the same basis as other physical capital, subject to
capital formation and asset depletion, and to integrate these
magnitudes into the flow accounts with appropriate modifica-
tions to national income, net domestic product, gross domestic
product, and the investment accounts.
Unfortunately, that effort failed. Only modest changes were
made in the SNA93, as Rob Smith's paper indicates. Twenty
years later the fundamental confusion and incoherence in the
system of national accounts remains and still promotes
E-mail address: robert.repetto@yale.edu.
0921-8009/$ - see front matter © 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecolecon.2006.09.004
confusion and error in economic policy, especially in those
countries most dependent on natural resources. As work starts
on the next round of SNA revisions, a key task remains adopting
this fundamental reform.
Even today, the SNA violates one of the most basic rules of
accounting. The difference in stocks between two dates does not
equal the net flow in the intervening period. In constant prices,
the value of a resource stock, say petroleum, at the end of the
year does not equal the value at the beginning of the year plus all
additions less all withdrawals. Though the stocks would appear
on the national balance sheet, the flow accounts do not record
additions as capital formation or withdrawals as capital
consumption. This inconsistency seriously distorts the income,
product and capital accounts. I used to tease national income
accountants by asking how they could sleep soundly at night
knowing that their accounts were so fundamentally inconsis-
tent as to violate this elementary accounting rule. They have
managed to do so for 20 years.
One contributing factor has been the under-representation
in national accounting decisions of voices from the developing
countries, in which natural capital usually forms a relatively
larger share of the overall capital portfolio, as World Bank
studies have shown, and in which resource depletion has
imperiled livelihoods and economic development. During the
1980s and 1990s researchers in many developing countries
recognized the relevance of this issue and set about trying to
construct natural capital accounts. These efforts in India,
Indonesia, China (starting in the 1980s), the Philippines, Thai-
land, Mexico, Brazil, Colombia, Chile, Botswana, Namibia, Cote-
d'Ivoire and in other developing countries were characteristi-
cally neglected in Smith's review, which focused on efforts in
the OECD countries.
However, the efforts in developing countries established at
least two important points. First, despite the weaknesses in the
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statistical apparatus in most such countries – weaknesses that
are by no means absent in the OECD world – it has been possible
at reasonable cost and time to construct meaningful accounts
that captured important resource trends. Second, the accounts
once constructed revealed information that is quantitatively
important and significant for resource management and
economic policy decisions.
The concerns of most advanced industrial countries are
focused less on natural resource depletion than on pollution
damages, pollution control costs, and materials flows within the
economy and much of the SEEA not only reflects those concerns
but represents a good deal of progress in sorting out the many
issues of classification and valuation. All well and good, and, as
Rob Smith's paper points out, countries are free to go on working
on those aspects of the SEEA that they find are most important
to them.
However, the system of satellite accounts guided by the SEEA
has proven to be relatively ineffective as a means of introducing
environmental and resource accounting into the system of
national accounts. As Smith indicates, most OECD countries
have continued to do whatever in the area of environmental
accounting they had been doing previously, which in the United
States is next to nothing.
As predicted 20 years ago, few statistical offices in developing
countries have had the resources to devote to satellite accounts,
finding it difficult enough to continue and improve the standard
system of national accounts. Only if the integration of natural
capital into the core accounts is made part of the SNA will it be
rapidly adopted throughout the world.
The objections that have been raised over the years, and
echoed in Smith's review, should finally be laid to rest:
a. Yes, integrating natural resources fully into the accounts
will make some aggregates inconsistent in definition with
earlier years, but is that a reason to go on and on
constructing accounts that are conceptually and empirical-
ly flawed and misleading?
b. Is it possible and appropriate to assign monetary values to
natural capital, some of which may be priceless and
irreplaceable? The most economically important natural
resource assets, such as land, forests, sub-soil minerals,
water and fisheries have monetary values established on
active markets. Accounts can be constructed for these
important assets even if all “ecosystem service” values
cannot be included.
c. Is there anything to be gained by tackling the difficult issues
of valuation, once physical magnitudes and flows have
been recorded? Aside from the problems in aggregating
physical flows if relative values are not used as weights,
monetization is essential if the system of national accounts
is to be used for its intended purposes of economic
management and analysis.
d. Are environmental statistics too scattered and unreliable to
incorporate into the SNA? There is a double standard at work
here. The economic data used in the national accounts, at
least in my country, are gathered by many poorly coordinat-
ed agencies, using various methodologies, and are of widely
varying reliability. Certain categories of personal income, for
example, are known to be very significantly under-reported
but nobody, to my knowledge, has used this as an argument
to drop personal income from the economic accounts.
e. There is no problem of inconsistency and incoherence in
the environmental statistics to compare with the mother of
all inconsistencies on which the entire SNA rests in its
treatment of natural resources assets.
The depletion and degradation of natural resources on which
billions of the world's least advantaged people depend for
livelihood and survival continue unabated. The mismanage-
ment of valuable natural resources that could underpin
sustainable economic development is rampant, giving rise to
the extraordinary notion of the “resource curse”. Yet, a relatively
simple accounting reform that could make more explicit and
transparent the development costs of resource degradation still
remains to be adopted.
Some years ago, Robert Solow, the Nobel laureate economist,
entitled an essay on this subject “An Almost Practical Step
towards Sustainability”. I puzzled for a long time over the word
“almost” since making this accounting correction seemed to me
to be eminently practical. Such leading economists as Das-
Gupta, Maeler, Hartwick, Weitzman, Nordhaus and others have
shown that the standard definition of national income, if
implemented correctly in our system of national accounts,
could provide a very workable guidepost toward sustainability.
Yet, 20 years down the road, we are still “almost” ready to take
this step. By no means should we have to wait another 20 years.