Green Accounting

EU Policy Context
 Lisbon (economic and social)
 Gothenburg (environment)
 Climate change 
 Sustainable transport 
 Public health
 Resource management
 Green accounting links economic and
environmental objectives
Overview of Presentation

Green (environmental) accounting

 Rationale
 Elements of Green Accounting: Theoretical
& conceptual basis
 Empirical progress in different contexts
 Conclusions for research and practical
applications.
Rationale for conventional accounting
 Measurement of economic activity -
production = GDP
 Often used as indicator of welfare
 Two elements of accounts
 Changes in Stocks of Capital - Investment
 Measurement of production/output –
Flows - Consumption
Standard National Accounts (SNA) framework

 NNP = C + I – D + X – M
Where:
NNP = Net National Product
C = Consumption
I = Investment
D = Depreciation
X = Exports
M = Imports

Misleadingly used as measure of welfare: welfare not

proportionate to consumption of produced goods
Green accounting – rationale
“The effect of mankind’s activity upon the environment
has been an important policy issue throughout the last
part of the twentieth century….
increasing recognition that continuing economic growth
and human welfare are dependent upon the services
provided by the environment”
Source: The United Nations Handbook of National Accounting -
Integrated Environmental and Economic Accounting

 Economic – Environmental linkages have implications

for meso- and macro-economic management
 Meso/macro-economic management more responsive
to environment if environmental indicators exist
Elements of Green Accounting - Outline
• Environmental services
• Ecosystem life support systems
• Landscape
• Environmental damages
• Pollution flows e.g air & water quality
• Defensive (environmental protection)
expenditures
• e.g. noise reducing windows & IPPC technologies
• Resource depletion
• Non-renewables; renewables
Empirical progress in Environmental
Accounting in different contexts
– some evidence
 UN initiative on Green Accounting – UNSEEA
(1993, 2000, 2003)

 System of integrated Environmental and Economic

Accounting (SEEA) – complements SNA method for
measuring economic activity
 Adds environmental information to existing Input-Output
economic data
 Physical stock and flow tables
 Hybrid (physical & monetary) stock and flow tables
 Methodological guidance on resource depletion,
degradation, defensive expenditures
Physical & monetary stock and flow tables
 Often known as NAMEAs (National Accounting Matrix
including Environmental Accounts).
 Physical flow accounts include four types of flow:
 products (produced in the economic sphere and used within
it),
 natural resources (mineral, energy, biological),
 ecosystem inputs (air and water) and
 residuals (solid, effluent, emissions).
 Each of these accounts is expressed in terms of
supply to, and use by, the economy.
 i.e. tables represent the flows between the economy
and the environment.
An indicator of weak sustainability:
genuine savings
 Genuine Savings = monetary savings less the
depreciation on manmade capital less the depletion of
natural capital. (From S = Iv identity)
 Value of changes in economy’s overall capital stocks.
 Negative genuine saving corresponds to

unsustainability, since if depleting capital stock, can

receive lower welfare from it in future

 Genuine Savings rates low or negative for Sub-Saharan

Africa and for Middle East and North Africa.

 Assumes all capital is substitutable

Genuine savings for Tunisia, as % of GDP
The Index of Sustainable Economic
Welfare (ISEW)
 ISEW (Daly and Cobb (1989))
 current welfare should be measured as the current
flow of services from all sources, rather than
current output of marketed goods
 E.g.
 value for leisure time to correct for the fact that welfare
could increase while NNP decreases if people choose to
work less;
 higher incomes of urban residents are compensation for
externalities connected with urbanisation and
congestion,  proportion of income should not be
included as welfare
 The Index of Sustainable Economic
Welfare (ISEW)

ISEW =
Consumption + Investment + Extra-Market services + Consumer Durables
Services + Services of Roads + Public Health & Education – Consumer
Durables Expenditure – Private Defensive Expenditure on Health /Education –
Advertising – Commuting costs – Pollution costs – cost of loss of ecosystems –
resource depletion costs – Long term environmental damage

 Applications at national level: UK, Sweden, Netherlands,

Italy, Poland, Austria
 Applications at local level: Siena (Pulselli et. al. 2006)
 Problem – mixes sustainability and welfare issues in single
measure
Index of Consumption Corrected for
Environmental Damage (ICCED)
- EC Greensense project
ICCED developed:
 to demonstrate how well-being changes

over time if sustainability standards

imposed and effects of environmental
damage are accounted for.
 corrects for environmental damage and

expenditure incurred under sustainability

policies (similarities with local EcoBudget
initiatives e.g. Roma)
 Sustainability targets analysed under the
GREENSENSE project

Environmental Weak Sustainability Intermediate sustainability target Strong sustainability target

Impact
Air pollution Invest the value of damage to capital Current legislation with Emission Ceilings Medium Ambition GAP Closure +
stocks due to air pollution. Emission Ceilings
/ Maximum Technical Feasible Solution
Climate Change Invest the NPV of the cost of current 550 ppmv by 2120 450 ppmv by 2120
carbon emissions ($4/tonne current
estimate)
Biodiversity Invest the value of damage to capital Natura 2000 network to be preserved 20% of all land to be preserved in natural
stocks due to biodiversity loss No further wetland loss or degradation condition
15% of agricultural area under management
contracts
No further deterioration of natural and semi-
natural forests
Natural resources Energy: Invest % of resource rents 12% energy from renewables by 2010 16-19% energy from renewables by 2010
Invest value of future price (current estimate)
Increases
Forestry: Invest value of future price
increases
Toxic Substances Invest the value of damage to capital Concentration levels of lead and cadmium Future steady-state concentrations of lead
stocks due to Toxic substances given in EU Directives and cadmium
Urban Not applicable since only current Not applicable since only current welfare Not applicable since only current welfare
Environmental welfare impacts impacts impacts
Problems (Noise)
Waste Invest the value of damage (e.g. land Landfill max. 35% of household waste; Land space availability
converted for landfill) due to waste Recycle 25%
Water Pollution Invest the value of any decline in water Satisfaction of the EC Water Framework Satisfaction of the EC Water Framework
resource stocks. Directive Directive
 Greensense: Environmental impacts on welfare (UK)

Intermediate Strong
Total environmental Impacts Billions of (2000) Euros Sust. Target Sust. Target
1990 1998 2006 2006
Air Pollution 24 13 6.6 5.5
Biodiversity -0.174 -0.044
Resource Extraction
Toxic Substances - dioxins 1.8
Toxic Substances - heavy metals 0.3 0.06 0.04
Noise 2 2.6 2.6
Waste (.19) (.18) (.23)
Water Pollution 0.5 0.4 0.2 0.2

Total 25 17 9 8
 Greensense: ICCED Measures - UK
Per capita (2000) Euros Intermediate Strong
UK Target Target
1990 1998 2006 2006
GDP 13238 22398 29523 29523
Final Consumption Expenditure 10910 18563 25313 25313

Env. Damage 426 294 161 143

Env Damage as % Consumption 3.91 1.58 0.64 0.56
Env Damage as % GDP 3.22 1.31 0.55 0.48

Avoidance cost 0.2 0.2

ICCED 25151 25170
Summary of Empirical initiatives
 NAMEA: includes environmental issues
within standard accounting framework
 Genuine savings – sustainability-related
decision rule
 ISEW – broader interpretation of
welfare
 ICCED – includes welfare effects of
meeting sustainability targets
Conclusions on Green Accounting
 Recognition of need to address both current welfare
and sustainability issues from macro-perspective
 National and international initiatives (e.g. UN SEEA,
2003) are developing improved methodologies
 Variety of initiatives reflects lack of consensus on
priorities and methods
 Local applications of methods can reflect regulatory
responsibilities but may be difficult to define
sustainability at this scale?
 Applications very data-hungry and modelling
intensive