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Sustainable Baltic Region Session 8 Chapter 4 PDF
Sustainable Baltic Region Session 8 Chapter 4 PDF
Green accounting
– the environment and natural resources
in national accounts
by Geir B. Asheim
24 green accounting
An expression for NNI, net national income
Weitzman (1976) associates Net National Income (NNI, alent, then the stationary equivalent increases. This
earlier referred to as Net National Product) with the means that the difference between NNI and consumption
stationary equivalent of future consumption. Hence, can be interpreted as saving. Combining expressions
NNI is the level of consumption that, if held constant, (1) and (2) yields
would yield the same present value as the path of con- NNI = consumption + (dNNI/dt)/(interest rate)
sumption that the economy actually will follow. In a = consumption + d(current wealth)/dt +
closed economy, this level of consumption is not actually (rate of change of interest rate) • (current wealth).
sustainable; it is hypothetically sustainable if consump-
tion at one time could be linearly transformed into Moreover the term d(current wealth)/dt can be split
consumption at some into value of net in-
other time. vestments (that is,
The figure illus- value of the chang-
trates this in a situa- es in the stocks)
tion where there are and capital gains
only two points in (that is, changes
time. in the value of the
However, as ar- stocks). Thus, as is
gued by e.g. Brekke developed in great-
(1995), a small open er detail in Asheim
economy with access (1996b) the follow-
to an international ing expression is
capital market can obtained:
linearly transform
(3) NNI = con-
consumption at one
sumption + (value
time into consump-
of net investments)
tion at some other
+ (capital gains) + (rate of change of interest rate)
time. Consequently, for such an economy the Weitz-
• (current wealth).
man foundation yields a measure of actual sustainable
consumption. Hence, NNI as a stationary equivalent is If (3) can be evaluated using current prices and quanti-
an exact indicator of sustainability in the context of the ties only, it can potentially be an operational measure
present chapter. When we subsequently refer to NNI it of NNI.
will be in the sense of a stationary equivalent. Weitzman (1976) makes two simplifying assump-
It is straightforward to show that NNI is equal to tions. He assumes that
the interest rate multiplied by the present value of • all technological progress is reflected by augmented
future consumption. The present value of future con- stocks of knowledge capital; this will be referred
sumption corresponds to current wealth. Therefore, to as an assumption of no exogenous technological
we obtain that progress. and
(1) NNI = (interest rate) • (current wealth) • the interest rate is constant.
How can these assumptions be used to simplify expres-
where the interest rate, if changing over time, cor-
sion (3)? The latter of these assumptions clearly means
responds to a long-term interest rate. This is not an
that the term (rate of change of interest rate) • (current
expression that national accountants find useful, since
wealth) in (3) vanishes. Furthermore, both assumptions
current wealth (= the present value of future consump-
jointly can be shown to imply that there are no capital
tion) is not easily measured (see, for example, Usher
gains (see Asheim (1996a)). Hence, Weitzman (1976)
(1994), see Section 4.4.
arrives at the following conclusion:
To translate expression (1) into a form that can more
easily be calculated, it is useful to note that NNI has (4) NNI = consumption + (value of net investments)
the following attractive feature: NNI increases if, and
only if, NNI exceeds actual consumption: This expression is of the same form as the conventional
measure of NNI (or NNP).
(2) dNNI/dt = (interest rate) • (NNI – consumption).
Hence, if consumption is less than the stationary equiv-
green accounting 25
tion by considering a case where value of such accumulation is also Theoretical models that include
this result does hold for a closed included. natural resources often predict
economy. Assume that all tech- When Weitzman (1995) evalu- that the interest rate will fall over
nological progress is reflected by ated his result nearly two decades time; this is the case if capital
augmented stocks of knowledge later, he wrote: ”The force of this management is sustainable in the
capital. Then the economy follows result is perhaps not sufficiently model of man-made capital accu-
a completely egalitarian path appreciated. Any ’sustainability mulation and resource depletion
(so that each generation ensures crisis’ looming over the horizon according to Dasgupta and Heal
itself the maximum sustainable should manifest itself now. Sus- (1974) and Solow (1974).
level of consumption) if and only tainability, which is a measure When these assumptions are
if it holds for any generation of future consumption, is exactly not reasonable, one might want to
that the increase in the stocks of reflected in current Green NNP. attempt to estimate the corrective
human and man-made capital is As noted in the box, Weitz- terms in the full expression of
in value equal to the decrease in man’s (1976) foundation yields an NNI (see formula (3) in the Box):
the stocks of natural capital. This exact indicator of sustainability in NNI = consumption + (value of
result is called Hartwick’s rule a small open economy. Two condi- net investments) + (capital gains)
(Hartwick, 1977; Dixit, Ham- tions are assumed to be valid: no + (rate of change of interest rate)
mond and Hoel, 1980). Rather exogenous technological progress x (current wealth).
than being a prescriptive rule and constant interest rate. If these It is doubtful whether opera-
for sustainable capital manage- hold then the rule for sustain- tional procedures will be devel-
ment, Hartwick’s rule is a result ability discussed (capital manage- oped for such an estimation. Un-
that characterizes an egalitarian ment is sustainable if, and only der the assumption of a constant
path. if, the value of net investments is interest rate, Weitzman (1995)
Of course, if the economy fol- non-negative) has been shown to derives a semi-operation formula
lows an egalitarian path, then be valid. It is therefore of interest that corrects NNI as specified
the problem of achieving sustain- to discuss how strong these as- in the simpler expression (see
ability has already been solved: sumptions are in the context of a formula (4) in the Box) for future
At any time consumption is equal small open economy. exogenous technological pro-
to the maximum level of sustain- No exogenous technological gress. However, this correction
able consumption. On the other progress. requires that there is information
hand, if an egalitarian path is not This appears to be a very on the pace of future technologi-
followed, then an indicator of the strong and empirically invalid cal progress.
level of sustainable consumption assumption since Likewise, a resource-rich coun-
is needed in order to determine try may calculate the effect of im-
• history would suggest that proving terms of trade as capital
whether capital management
technological progress has gains on its stocks of unexploited
is sustainable. The next section
been important for the devel- reserves. However, such a calcula-
investigates a foundation for a
opment of economies and tion requires information on the
concept of national income de-
signed to serve this purpose. • technological progress is not development of future resource
normally thought to be re- prices. Finally, the full expres-
flected in augmented stocks of sion establishes how – in princi-
4.3 Measures of Net knowledge capital. ple – adjustments can be made
National Income Special considerations arise for for non-constant interest rates.
open economies. The ‘technology’ However, this requires informa-
The derivation of an exact expres- tion on the path of future interest
of an open economy must include
sion of NNI where ‘NNI = con- rates. It seems fair to argue that
its trade opportunities. Therefore,
sumption + value of net invest- there is no reliable information
the assumption of no exogenous
ments’ is given in the box. The on future technological progress,
technological progress will be
expression is of the same form as on future resource prices or on
violated if its terms of trade are
the conventional measure of NNI future interest rates.
changing. If resource prices tend
(or NNP). It is therefore impor-
to increase, then a resource-ex-
tant to note that the value of net
porting country will enjoy improv-
investments is here assumed to 4.4 The real calculation
ing terms of trade, which within
incorporate depletion of natural
resources and degradation of
the present context corresponds will be difficult
to positive exogenous technologi- Since at best only unreliable
environmental resources. Such
cal progress. estimates of the corrective terms
depletion and degradation, evalu-
Constant interest rate. of the full expression (3) can be
ated at market prices (which are
For an open economy, a con- made, one may be forced to adopt
assumed to exist!), is subtracted
stant interest rate corresponds the simpler expression (4) as the
in the measure of NNI. Hence,
to unchanging terms of inter-tem- concept of NNI that incorporates
this measure corresponds to what
poral trade. It seems too strong to natural and environmental re-
is usually called Green NNP. Fur-
assume that the interest rate will sources. This latter expression
thermore, if stocks of knowledge
be constant at all future times. creates challenges of its own,
capital are augmented, then the
26 green accounting
sions gives information about the
direction of the bias under differ-
ent circumstances:
1. if there is technological
progress, expression (4) is
likely to underestimate the
sustainability of the economy;
Nordhaus (1995) and Weitz-
man (1995) argue that this
bias is potentially large;
2. if the open economy has rela-
tively large stocks of unex-
ploited natural resources,
then the expression (4) will
underestimate the sustain-
ability of such an economy due
to improving terms of trade
which manifest themselves as
capital gains on these stocks;
3. if interest rates are decreasing,
then the interest rate term in
(3) entails that expression (4)
will overestimate the sustain-
ability of the economy.
The discussion in this chapter
has sought to argue that it is a
very demanding task to construct
a measure of NNI that can be
a reliable indicator of the sus-
tainability of an economy. Even
though, in theory, such a task can
be accomplished, in practice it
seems to require information that
is not readily available.
green accounting 27
Environmental accounts in Sweden
Work on developing environmental accounts is for private consumption.
currently under way in most countries in the West,
as well as internationally within the framework The data have been aggregated in so-called
of fora such as the UN, the OECD and the EU. economic environment indicators. These are key
In Sweden the task to establish such accounts ratios representing the links between the different
was commissioned by the government in 1992 sectors of society and environmental impact. The
to Statistics Sweden, the National Institute for indicators may for example provide information on
Economic Research and the Environmental Pro- marginal emissions quota, reflecting how emis-
tection Agency. Below follows a short description sions change in pace with changes in production
of some of the results as of January 1997, as volumes.
extracted from reports. The so-called environmental economic profiles cal-
culated from the accounts show how the different
What are environmental accounts? sectors contribute to the economy, to employment,
their energy use and emissions of pollutants.
The term ‘accounts’ refers to the compilation of
statistics in an organized form, under a number A study of sulphur emissions
of headings, in which credit items are balanced Results are available for nitrogen and sulphur
against debit items. The national accounts give an emissions. Below follow some results from the pi-
overall picture of the economic flows in society. lot case, used to test the design of environmental
For environmental accounts, environmental accounts, that was carried out on the 1991 data
statistics are prepared and presented alongside for the impact of sulphur emissions. The valuation
economic statistics. The purpose is to develop a covered four different types of area: forests, agri-
system in which it is possible to deal with the use of cultural land, fresh water, and built-up areas. The
natural resources and the environment in the same price tag of society was estimated on the basis of
way as all other resources in national accounts. lost output, valued at market price, or the cost of
restoring the damage.
The data are prepared in two steps. Firstly, envi-
ronmental data are given in physical terms such The approach taken was one of studying the cycle
as tonnes of a given emission; in the second step of sulphur, production use and deposition and the
monetary accounts are drawn up on this basis by
linking figures on emissions and waste with a set
price on the impact it causes.
The main objective of the work is to produce a
complete system of measures that illustrates the
impact of different types of economic activity on
environmental and natural resources and vice
versa. In the short term it will not be possible to
produce a ‘green GNP’ but it should be possible to
achieve a ‘greening of GNP’.
The Swedish system
The Swedish system for environmental accounts
is called SWEEA. A matrix has been developed for
entering environmental data in the system called
METRIS. The system has currently been adapted
for data on
• energy use
• emissions of SO2, CO2, NOx, VOC and organo-
chlorine compounds
• flows of nitrogen and phosphorus
• environmental protection statistics
• solid waste
• material flows for wood, iron and steel
The material is provided for 16 different sectors of
trade and industry, as well as the public sector and
28 green accounting
Table 1. Endangered value/type of natural assets. The categories calculated in
the sulphur study are marked by *.
Health Biodiversity Resource Natural and
management cultural landscape
Forests *
Cultivated landscape *
Freshwater *
Urban areas * *
Natural land
green accounting 29