Green accounting for a sustainable economy

Ecological Economics 29 (1999) 155 – 170

ANALYSIS

Green accounting for a sustainable economy Policy use and analysis of environmental accounts in the Philippines Peter Bartelmus 1 United Nations Statistics Di6ision, New York, NY 10017, USA Received 12 February 1998; received in revised form 30 July 1998; accepted 31 July 1998

Abstract Statisticians avoid getting involved in data analysis, leaving data users on their own in interpreting the results of their work. This is particularly unfortunate in a new area of applied statistics such as environmental accounting with which few are really familiar. Earlier this year data producers and users explored, in a national seminar, possible policy applications of the results of a ‘green accounting’ project in the Philippines. The main findings of the author’s contribution to the seminar, on which the present paper is based, are that environmental accounts: (1) present evidence of sustainable economic performance in the country during the relatively short-time period of 1988 – 1994; (2) provide information for environmental cost internalization; (3) may guide investment to environmentally sound production processes; (4) help to specify and monitor policies of natural wealth conservation, distribution and management; and (5) reveal major data gaps. The paper concludes that environmental accounts help to assess the sustainability of economic growth in terms of broadly defined capital maintenance. The sustainability of development, however, would have to be measured by alternative or supplementary physical indicators linked to quantifiable standards or targets. © 1999 Elsevier Science B.V. All rights reserved. Keywords: Cost internalization; Environmental accounting; Natural wealth; Philippines; Sustainability; Throughput

1 The author is a staff member of the United Nations. The views presented here are his own and not necessarily those of the United Nations or the Philippine authorities.

0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII: S0921-8009(98)00086-X

156

P. Bartelmus / Ecological Economics 29 (1999) 155–170

1. Introduction Last year a front-page series of the New York Times (28 and 29 November 1997) proclaimed that pollution of air and water across Asia represents a ‘‘hovering environmental disaster’’. Over two million Asians are believed to die annually from the effects of pollution. The cost of Asia’s economic miracle shows up in the world’s ‘‘dirtiest water, filthiest air, most worrisome overfishing and the fastest disappearing coral reefs.’’ At the same time, the environmental threat meets with obliviousness by both the governments and governed. The Philippines are part of this picture, deemed to have ‘‘one of the worst environmental records around,’’ with Manila among the most polluted cities of the world. Can we dismiss this dismal picture as journalistic dramatization? If the data provided are, according to the New York Times, just ‘‘statistical stabs in the dark,’’ what is the probability that these stabs have hit upon vital nerves of Asia’s life-support system? Recent extensions of the Philippine statistical system shed light on the interaction between environment and economy, with a view to assessing the sustainability of growth and development. New methodologies of ‘green accounting’, proposed as a satellite of the world-wide adopted System of National Accounts (SNA)2 were implemented by the National Statistical Coordination Board (NSCB), in collaboration with other national agencies and with the technical support of the United Nations Statistics Division (UNSD).3 2

The concepts and methods of the System of Integrated Environmental and Economic Accounting (SEEA) were published as a handbook of the SNA by the United Nations (1993). The satellite approach was criticized, notably by the anonymous reviewer of this article, as preserving in the central SNA (CEC et al., 1993) the old measures which exclude environmental deterioration. However, the current review of the SNA is not expected to change this approach, given the focus of conventional accounts on observable market transactions and their role in assessing short- and medium-term disequilibria in the economy. 3 Some project results were summarized for an international conference (Domingo, 1998). The proceedings of the conference (Uno and Bartelmus, 1998) present an overview of cur-

The Philippines has now institutionalized, by presidential decree, environmental accounting as part of its official statistical system. Similar institutionalization of the compilation of indicators of sustainable development is envisaged under the Philippine Agenda 214 (PA 21, 1997, pp. 26, 99). Once data collection has been carried out, statisticians usually refrain from analysing and interpreting the results of their work. The rationale is to avoid any appearance of taking sides in policy analysis, which might harm the well-established reputation of objectivity of the national statistical office. However, this has the unfortunate consequence that a good deal of knowledge about the meaning and contents of indicators compiled is lost for data use. In a new and complex area of applied statistics, such as environmental accounting, users may not fully understand the composition and thus relevance of indicators for planning and policy making. The national seminar on the Presentation of PSEEA Results, Policy Uses and Applications (Manila, 15–16 January 1998) to which a draft of this paper was first presented was an initiative to overcome this schism between data production and use in the field of environmental accounting. The following illustration of the potential uses of the results of the Philippine pilot study of environmental accounting should be seen as a starting point for a continuing dialogue on data use between statisticians, administrators, policy makers, researchers and other involved groups of civil society.

2. Sustainable growth and development: paradigms for policy integration Environment and economy interact. Policy failures in both environment and development can be rent approaches to and application of environmental accounting. Together with the United Nations (1993) handbook on the SEEA, this publication should be consulted for further information on the concepts and methods applied in the Philippines, as details on definitions and accounting procedures are not further discussed here. 4 Republic of the Philippines. Cited in the following as PA 21 (1997).

P. Bartelmus / Ecological Economics 29 (1999) 155–170

traced back to the neglect of this interaction in line ministries and specialized agencies. As pointed out above, the costs of Asia’s economic miracle are losses of natural resources and environmental degradation. Environmental source and sink functions of natural resource supply and waste absorption are impaired by economic activities, with repercussions on these very same activities and human well-being. The obvious answer to this interaction is policy integration to ‘ensure’, in the words of the Brundtland Commission, ‘‘that… policies, programmes, and budgets support development that is economically and ecologically sustainable’’ (World Commission on Environment and Development, 1987, p. 20). Taking its clue from the Brundtland Commission, ‘sustainable development’ was propagated by the 1992 Rio Summit on Environment and Development as the new paradigm for integrative planning and policies.5 Last year, governments reconfirmed their commitment to sustainable development policies in the Rio +5 Special Session of the UN General Assembly. The Philippines was one of the first countries to respond to the call for sustainable development by the Rio Summit. The government created a Council for Sustainable Development and remains committed to the implementation of the new paradigm: President Ramos, in the foreword to the Philippine Agenda 21 (PA 21, 1997), considered sustainable development as ‘‘a matter of survival’’. A long list of concerns of natural resource depletion (deforestation, erosion of agricultural lands, destructive fishing) and environmental quality degradation (air and water pollution, habitat destruction) follows. How bad 5

The Commission also offered the popular definition of sustainable development as ‘‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’’ (World Commission on Environment and Development, 1987, p. 43). This definition is quite vague, however. It does not specify the time horizon of future generations, gives no indication of the role of the environment and refers to the difficult-to-determine concept of human needs. The following sections describe different attempts at operationalizing the notion of sustainability by means of extended monetary accounts and physical indicators.

157

is all this? To paraphrase (PA 21, 1997, p. 7): are the gains of economic growth diminished or even negated by environmental destruction? In other words, is economic growth in the country sustainable?

2.1. Assessing sustainability: an emerging dichotomy To assess environment–economy interaction in an integrative fashion both ‘economists’ and ‘environmentalists’ looked into their analytical tool kits so as to apply them to the other field.6 Environmental economists seek to incorporate scarce environmental goods and services into their economic, monetary value system. Their premise is that environmental functions can be treated like commodities for which individuals can express their preferences in money terms. A variety of valuation techniques to capture these values have been developed for cost–benefit analyses of environmental projects; some of these techniques have been incorporated in methodologies of environmental accounting, notably the SEEA.7 Environmentalists contest the notion that the environment can be treated as a commodity. To them, the environment is an indivisible national or global heritage about which people have personal convictions rather than preferences in terms of economic cost or benefit (see, e.g., Jacobs, 1994, Doob, 1995, Foster, 1997). Since the real value of nature, and changes therein, cannot be expressed in money terms, physical indicators or indices of the quality of life, human development or sustainable development have been advanced.

6 The sweeping distinction between environmentalists and environmental economists is to illustrate a growing polarization between neoclassical economists advocating the internalization of environmental ‘externalities’ into the budgets of economic agents and the more holistic world view of the environment and human activity, notably by ‘deep ecologists’. Of course, neither these schools of thought nor their representatives may fully fit into this simple categorization. For more details on this new dichotomy, see Bartelmus (1997). 7 For discussion of the pros and cons of different valuations and their consistency with the market valuation of national accounts, see Bartelmus (1998).

158

P. Bartelmus / Ecological Economics 29 (1999) 155–170

Fig. 1. Index of material/energy intensity (IMEI), 1970–1993. Average (for all selected materials) percentage deviation from the average consumption of each material per GDP (1970–1993, in constant prices). Materials included are cement, steel, freight and energy. See Ja¨nicke et al. (1989), de Bruyn and Opschoor (1997) for a detailed description of the concepts and method of the index calculation. Source: Bartelmus (1997).

To increase their policy relevance these indicators need to be linked to environmental limits, thresholds or carrying capacities of natural systems. In the absence of agreed sets of such thresholds or standards, attempts have been made to measure at least overall environmental pressure from economic activity. One such pressure index is the throughput of energy and materials through the economy (Ja¨nicke et al., 1989, de Bruyn and Opschoor, 1997). The rationale is that material throughput turns low-entropy mass into high-entropy waste (Georgescu-Roegen, 1971). The result is a distinct dichotomy in measuring and analysing the interface between the environment, and economic performance, growth and development. The dichotomy reflects two different views of the role of the environment with regard to the sustainability of human activity. On the one hand, economic sustainability aims at the long-term preservation of economic output, income or consumption through the maintenance of

both produced and natural capital. Ecological sustainability, on the other hand, focuses on the preservation of human populations in a given territory, endowed with limited natural assets, and at desirable standards of living. The environment is thus seen as either a requisite of economic growth or as the provider of essential consumer services or amenities from limited natural (carrying) capacities.

2.2. Reaching the limits of growth? En6ironmental pressure in the Philippines Ecological sustainability implies the existence of physical limits or thresholds whose transgression disrupts economic growth with disastrous consequences of famine, environmental catastrophes or social strife. Is the Philippines close to these limits because of human pressures on natural assets? As pointed out above, material throughput indices attempt to measure such pressures.

P. Bartelmus / Ecological Economics 29 (1999) 155–170

Fig. 1 shows the trends of an Index of Material/ Energy Intensity (IMEI) (defined in footnote ‘a’ of Fig. 1) for the Philippines. Declining average material and energy intensity is typically found in industrialized countries, indicating a ‘delinking’ of economic growth from environmental depletion and degradation.8 In contrast, the Philippines exhibit fairly erratic changes in the 1970s, but there seems to be increasing environmental pressure since the mid-1980s. However, it is not possible to make any direct conclusions about the closeness to overall physical carrying capacity limits without further examination of the relations between environmental pressure and ecological thresholds at local and national levels. The calculations suffer furthermore from the general drawbacks of any physical indicator aggregation, i.e. arbitrary weighting and indicator selection. In the case of IMEI, different environmental impacts, generated by different material inputs, are given equal weight, possible substitution of materials is not accounted for, and the effects of environmental protection are not always reflected in reduced material intensities. All these aspects would require further analysis, impairing the direct use of the physical index in policy making.9 Use has therefore been made of the superior integrative capacity of the national accounts, which apply a common nume´raire, the market price, and a rigorous system of accounting relationships to compare heterogeneous goods and services in a common format. Given the failure of the environmentalist approach to assess overall ecological sustainability in physical terms, the alternative is indeed to apply the economists’

8

See, for example, Ja¨nicke et al. (1989), although a more recent study by de Bruyn and Opschoor (1997) found evidence for some ‘relinking’ in industrialized countries since the mid1980s. Note in this context that a declining IMEI may indicate both an increase in the absolute level of throughput, but relatively lower than GDP increase (termed ‘weak’ delinking or dematerialization), or an absolute decrease of throughput (‘strong’ delinking) (de Bruyn and Opschoor, 1997). 9 As one of the reviewers of this paper pointed out, the role of different pricing, especially energy pricing, and changing production structures should be analyzed for explaining differences in material/energy intensities between developing and industrialized countries.

159

tools of monetary valuation to scarce environmental functions. This is done ‘systematically’ by extending the world-wide adopted national accounts system into the environmental field.

2.3. Is Philippine growth sustainable? Economic theory and accounting already use a narrowly defined sustainability criterion when considering the depreciation or consumption of produced capital. The idea is to distinguish clearly between income and capital in order to avoid consuming the capital base of income generation. By extending the asset boundary of national accounts from produced ‘fixed’ capital to non-produced natural assets of land/soil, minerals, forests, fish, water and environmental sinks for pollutants of air, water and land, a broader concept of sustainability of economic performance can be defined operationally. Sustainability of economic activity can thus be determined in terms of the maintenance of produced and natural capital used in the production of goods and services. Costing produced and natural capital consumption in the national accounts obtains an environmentally adjusted net domestic product (EDP). Upward trend of EDP provides therefore a better picture of sustainability of economic growth than the conventional indicators of GDP or NDP. Extrapolation of positive trends into the future defines sustainable economic growth as non-declining EDP, assuming that the allowances made for capital consumption are reinvested in capital maintenance. In addition, this definition would have to consider that trends of depletion and degradation can be offset or mitigated by technological progress, substitution of production factors, discoveries of natural resources and changes in production and consumption patterns. Other effects, e.g. of natural disasters, changes in the productivity of human capital or high inflation and indebtedness, may also affect the sustainability of economic growth. Using non-declining EDP as the indicator of sustainable growth yields therefore only a ‘more sustainable’ measure of economic growth—as compared to conventional growth indicators (Bartelmus, 1994, p. 70). Further refinement or modelling of this concept, al-

160

P. Bartelmus / Ecological Economics 29 (1999) 155–170

Fig. 2. GDP, NDP and EDP, 1988–1994 (billion P). Source: National Statistical Coordination Board (NCSB).

lowing for these effects, would significantly enhance the assessment of the sustainability of longterm economic growth. In the Philippines, the environmental accounting project produced first estimates of EDP. Fig. 2 shows the typical parallel movement of GDP and NDP, which might be largely due to estimation procedures (applying constant capital consumption factors to gross value added) rather than actual ‘wear and tear’ of capital. Overall, the EDP aggregates maintain the general upward trend of their conventional counterparts, GDP or NDP. Of course, the deduction of environmental costs reduces the level of NDP by amounts ranging between 2% and 13%, but sustainability of economic growth cannot be rejected by the accounting results shown in Fig. 2. Preferable longer time series and constant-price estimates were not available, owing to unresolved methodological questions of deflating environmental costs (Steurer et al., 1998) and data gaps. Nonetheless non-declining, albeit slow, growth of GDP in constant

(1990) prices supports the claim of overall sustainability of economic activity, at least for the 1988– 1994 period, and in the limited sense of natural capital covered and consumed.10 There seems to be some convergence between EDP and NDP in the 1990s, indicating a relative reduction in environmental costs generated by the economy. There is little difference between EDP 1, i.e. NDP adjusted for natural resource depletion by applying the so-called ‘net-price method’, and EDP 2, obtained by further deducting pollution costs at ‘maintenance value’.11 The reason might indeed be that, with a relatively small effort

10 Of course, closing the data gaps will provide a more accurate description of the overall sustainability of economic performance of the country. The current ‘pilot project’ should thus be seen as a first step towards better reflecting additional scarcities in natural capital and capital services, capturing at least part of hitherto neglected non-sustainabilities. 11 For the assumptions in these and other methods of asset pricing and environmental costing in environmental accounts, see Bartelmus (1998).

P. Bartelmus / Ecological Economics 29 (1999) 155–170

161

Fig. 3. 213Net capital accumulation in per cent of NDP, 1988 – 1994. Sources: Bartelmus, 1997; NSCB.

of environmental maintenance, in terms of pollution prevention costs, emissions could have been reduced to desirable levels; it might also simply reflect undercoverage of emissions. Another way of looking at the (non)sustainability of economic performance in the Philippines is to assess the country’s ability to generate new capital after taking produced and natural capital consumption into account. Fig. 3 shows net capital accumulation (NCA: net capital formation minus natural capital consumption) in per cent of NDP. Except for 1988, the Philippine economy exhibited positive rates of environmentally adjusted capital formation or net capital accumulation (NCA). This confirms the non-decreasing EDP trend of Fig. 2. However, overall positive NCA may hide the fact that capital formation may have been achieved by increasing the country’s dependence on foreign capital transfers. At an average of 93% (during the 1988 – 1993 period), the ratio of final consumption over EDP hovered indeed close to 100%, i.e. at a level where all that is produced is consumed and hardly any domestic saving is generated for new capital formation. Overall, the Philippine economy seems to have

been on an—economically—sustainable path during the period covered. On the other hand, increasing environmental pressure, in terms of IMEI, suggests a risk of violating environmental thresholds or standards. For more concrete policy recommendations, such generic statements need further exploration, both in terms of the origins of environmental costs of depletion and degradation and in terms of their physical counterparts, linked to explicitly set sustainability standards. The next sections address these questions in more detail. Given the multi-purpose character of national accounting, many other analyses of their greening could be imagined. The following is therefore more an illustration of selected applications than a comprehensive review of policy uses.

3. Maintaining natural wealth The SEEA links natural asset accounts to income and production accounts in line with the basic SNA principle of recording consistently economic flows and stocks. This permits the assessment of the stock of natural resources and pro-

P. Bartelmus / Ecological Economics 29 (1999) 155–170

162

duced capital at a particular point in time, as well as the costing of changes in stock during the accounting period.

3.1. A6ailability, producti6ity and distribution of national wealth Availability of productive wealth is the baseline for assessing the long-term growth potential of the national economy. It is questionable, though, if this argument justifies a paradigmatic shift from flow (income, finance, production, capital formation, trade) to stock (capital) analysis of sustainable development as advocated by the World Bank (1997, p. 19). Rather than providing a static picture of economic potential at a particular point in time, it is probably more important to measure what a nation is actually doing with its wealth, i.e. the changes in wealth during a period of time. There are, however, important aspects of economic power and productivity of different wealth categories that can be examined for policies of social equity and efficiency of capital use. Comparing the physical stocks of natural and produced wealth is hardly possible in different units of weight, area or volume. For the analysis of the relative significance and distribution of different ‘economic’ wealth categories, physical stock data need to be expressed in monetary values.12 Lack of data on fish stocks and pro-

Table 1 Natural wealth, 1988–1994 (opening stocks, billion P)

1988 1989 1990 1991 1992 1993 1994

Forest

Minerals

Groundwater

Agricultural land

594.1 521.0 569.3 556.7 605.1 689.5 738.7

38.8 45.4 48.2 54.3 38.5

537.9 473.4 521.6 542.2 648.6 718.9 756.8

389.4 433.9 491.5 580.2 635.4 687.9

Sources: DENR, UNDP, NEDA (1996) and NSCB. 12 ‘Economic assets’ are defined in the SNA (CEC et al., 1993, para. 13.12) as assets ‘‘over which ownership rights are

duced assets prevent for the time being such analysis for the Philippines. Table 1 thus shows only that forests, groundwater and agricultural land are of about equal economic importance in the country. The table also indicates that natural wealth increased in monetary terms. Of course this may be largely due to price increases. For example, the value of forests went up by nearly a quarter by 1994 (from its 1988 level), while at the same time its volume decreased by about 30% in constant prices and cubic metres.13 Clearly, both physical and monetary accounts need to be consulted before making any managerial or policy decision on the short- or long-term exploitation of particular natural resource stocks. Expanded wealth accounting can provide essential information for the analysis of capital productivity, short- and medium-term policies of redistributing national wealth more equitably, and long-term policies of preserving national wealth for future generations. For instance, one of the early studies of environmental accounting in Mexico showed dramatic changes of capital productivity (measured conventionally as net value added per capital stock) when environmentally adjusted measures of value added and capital (including natural capital) were applied (van Tongeren et al., 1991, pp. 29–30). In the absence of such information in the Philippines, one can only speculate about possible changes in investment policies, supporting or discouraging capital formation in different sectors and for different categories of natural and produced capital. Policies of redistributing wealth more equitably would require information on the ownership of natural assets by domestic and multi-national agents. In the Philippines there is particular interest in ancestral rights of indigenous people (PA

enforced… and from which economic benefits may be derived.’’ The monetary valuation is at commonly applied ‘net prices’ (for the assumptions underlying this valuation technique, see, for example, Bartelmus, 1998, pp. 279 – 281). 13 The full asset accounts show the change in asset value due to price changes as a ‘revaluation’ item, i.e. as ‘holding gains or losses’ in accounting terminology (see NSCB, 1998).

P. Bartelmus / Ecological Economics 29 (1999) 155–170

21, 1997, p. 46), security of land tenure (p. 57) and empowerment of local communities (p. 8).14 The provision of property rights to individual stakeholders, for turning common-access resources into private ownership, is generally considered to be a tool of more efficient environmental and natural resource management. Such policy would not absolve governments from tenurial control. This applies in particular to multi-national corporations whose resource exploitation rights and pricing strategies should be made transparent for realistic rent (profit) assessment and capture through taxation. As mentioned above, Table 1 describes only economic assets (in the SNA sense). It does not include environmental assets such as lands in the wilderness, habitat or biodiversity. The calculation of ‘option’ or ‘existence’ values of these assets, which are not traded in markets but for whose availability individuals may be willing to pay, is hardly applicable in national accounting (see 15). Physical indicators of area, volume, absorptive capacity and quality are therefore better measures of the availability of environmental functions. PA 21 (1997) calls for both types of assessment, notably option values of forest re-

14 Sustainability of natural systems may differ considerably at the local levels owing to different endowments with natural resources and waste absorption capacities. Economic activities, their impacts and responses by sub-national administrations can be usefully explored by regional (sub-national) environmental accounts that are currently tested in the Philippines. 15 For instance, contingent valuation, exploring the willingness to pay for the avoidance of environmental effects, faces free-rider attitudes, short-sightedness or ignorance about longterm environmental impacts, and typically neglects effects of income levels and distribution when questioning individuals. Moreover, willingness-to-pay values are inconsistent with the market values of conventional accounts, which exclude consumer surplus. Other methods such as costing increased travel when moving out of polluted places or assessing the decrease in property value due to pollution (hedonic pricing) may be more consistent with market values but face problems of sorting out environmental from other socioeconomic effects. At least for now, such valuations do not seem to be applicable in recurrent national accounting; they could be usefully explored in more experimental studies of selected environmental concerns or particular regions.

163

sources (p. 21) and biodiversity (p. 93), and physical inventories of forests (p. 36), freshwater (p. 79) and biodiversity (p. 88). Only further experience with both information categories will tell about their comparative use and usefulness in monitoring the national agenda.

3.2. Natural resource policy: costing capital consumption The above analysis of the stock of natural capital provides an outlook on the long-term potential for economic growth. For short- and medium-term decisions on the management of natural resources, flow data on the changes of stocks, in both physical and monetary terms, become more relevant. The SEEA uses the SNA categories of these changes to derive a concept of ‘depletion’ consistent with produced-capital consumption, and to be clearly distinguished from ‘other volume changes’. Other volume changes are brought about by activities other than production and can therefore not be considered as cost of production.16 As a result both the consumption of produced (fixed) capital and the depletion of natural (economic) capital can be deducted from gross value added (GVA) and GDP to obtain environmentally adjusted net value added (EVA) and EDP. Overall, depletion seems to be decreasing, in terms of the total-depletion-over-NDP ratio in Table 2, from a relatively high level, prior to logging ban in 1992. It would be interesting to learn to what extent low depletion in recent years is due to an already largely depleted natu-

16 This distinction is typically ignored in assessments of natural resource use outside the national accounts format. See, for example, the Philippine Environmental and Natural Resource Accounting Project which calculates the physical basis of natural resource depreciation as the difference of all additions and reductions during the accounting period (DENR, UNDP and NEDA, 1991, pp. 2 – 3). The results are ‘cost’ or ‘benefit’ values and corresponding aggregates which are not comparable with the conventional macroindicators such as NDP or capital formation.

P. Bartelmus / Ecological Economics 29 (1999) 155–170

164

Table 2 Depletion of natural resource in per cent of value added a, 1986–1994 Agriculture and hunting b 1986 1987 1988 1989 1990 1991 1992 1993 1994

5.0 4.0 3.7 3.9 2.2 2.0 1.0

Forestry and logging c

187.0 134.2 116.9 181.5 7.9 5.4 5.6

Fishing

0.0 0.9 0.5 1.0 1.4 1.9 1.8 1.5 –

Mining and quarrying

Water works and supply c,d

Total (of NDP)

8.5 7.4 4.0 1.4 0.0 2.0 3.0

250 248 269 311 338 334 352

11.1 6.0 12.2 4.6 1.4 1.4 1.2

a

For the different sectors net value added was not available and gross values (including capital consumption) had to be used. Soil loss at cost of nutrient replacement and fertilizer application; also included is the value of forest depletion due to conversion to (largely) agricultural use. c Multiples of gross value added; see text. d Groundwater depletion (including effects of saltwater intrusion) only. Source: NSCB. b

ral resource base or undercoverage, or whether compensating efforts — e.g. of plantation, aquaculture or importation of natural resources — are responsible for low-level resource use/losses. For example, imports of roundwood did jump by about 45% from 1991 to 1992. This example points to the important question of how national sustainability is affected by international trade and its liberalization. Current trends of globalization seem to have received a conditional welcome by President Ramos in his 1997 Rafael Salas lecture in New York. Analysis of current and expected exports and imports of natural resources can provide an indication of import and export of depletion at the expense, or to the benefit, of the sustainability of the national economy. Depletion (i.e. non-sustainable use of natural resources) takes place as part of production by enterprises and households. In the Philippines, as in many other developing countries, difficulties in measuring subsistence activities are the reason of considerable undercoverage of output generated by households for own use. This is revealed in Table 2 for forestry and water supply where depletion costs exceed value added despite a 20% allowance for undercoverage in forestry. Full

coverage of household production, as recommended by the 1993 SNA (CEC et al., 1993, para. 6.24) would not only produce a more realistic share of depletion cost in value added but would also provide a better picture of economic performance in the country. It is reasonable to expect that depletion costs are already accounted for in the corporate accounts of the resource users or owners. In this case, the calculation of EVA and EDP would simply correct inflated values of the conventional indicators. Such correction would describe more accurately the production structure and sources of income of the economy, required for the assessment of the effects of economic (stabilization, structural adjustment, etc.) policy. For natural resource policy and management, costing depletion, in terms of permanent losses in production and income, is the basis for making decisions about desirable exploitation regimes. In the case of conditionally renewable resources such as forests, fish or water, physical environmental accounts alert to permanent losses beyond renewability or sustainability. ‘Bioeconomic models’ (PA 21, 1997, p.78) are needed to determine the levels of sustainable cut or catch. Policy reactions

P. Bartelmus / Ecological Economics 29 (1999) 155–170

may include command-and-control action such as the Philippine logging ban. Alternatively, and considered to be more efficient from a resource allocation point of view, the use of market instruments would discourage over-exploitation and encourage sustainable resource use. Royalty payments or user fees should be tailored to reducing depletion up to the amount where sustainability is reached, for instance by selective rather than clear cutting of trees. Zero depletion and depletion costs would be the result. Alternatively, government policy might accept the loss of a renewable resource for the sake of economic development. In this case, rents captured by fees or taxation should at least be reinvested in alternative forms of human capital, renewable natural assets or reproducible fixed assets — a policy of weak sustainability (i.e. overall capital maintenance). Reproducible fixed assets include produced natural capital, which may maintain some of the ecological functions of the original asset as in the case of forest plantations. Of course, governments might consider making good on their ‘environmental debt’ of past depletion and invest in reforestation or other regeneration of natural systems for the benefit of current and future generations. Such expenditures are recorded in the SNA and SEEA as current and capital expenses according to conventional accounting procedures. Any extraction of non-renewable resources is by definition permanent depletion of the resource. Non-use of the resource could be considered squandering the resource, needed for purposes of economic growth. The government might intervene, however, by capturing resource rents or depletion costs if it considers private exploitation regimes and rent uses inappropriate. This would be the case when rents are used for consumption rather than invested in capital maintenance, or when the government applies non-economic criteria of intergenerational preservation of natural capital. As in the case of renewable resources, user fees or production taxes, set at the level of depletion cost, can be considered preferable to direct control, such as exploitation quotas. The purpose is to encourage more efficient patterns of resource exploitation and structural adjustments in the economy.

165

4. Pollution: accounting for accountability

4.1. Monitoring pollution and its welfare effects Systems or frameworks of environment statistics aim at measuring the full sequence of pollution, including: “ The emission of pollutants at the source by households and enterprises. “ The loading and concentration of pollutants in environmental media of air, water and land. “ The exposure of biota, including humans, to these concentrations. “ The effects of exposure on human health and well-being. Tracing the physical impacts and effects of pollution entails difficult estimations and modelling, notably of pollution pathways, dispersion and concentration of pollutants, and dose–response relationships. Even more controversial is the costing of the effects of pollution on human health and well-being. Well-known problems of applying damage valuations in cost–benefit analysis of programmes or projects accumulate at the national level.15 Furthermore, time-lagged and synergistic (from different pollutants) effects of emissions and cross-border flows of pollutants impair the correct allocation of environmental welfare effects to causing agents. Such allocation is required for the internalization of the ‘external’ effects of pollution, making the polluters accountable for environmental costs imposed on others. The SEEA application in the Philippines confined itself, therefore, to costing the direct interaction between environment and economy. Only in this case can emissions of pollutants be linked unequivocally to the responsible economic—production and consumption—activities. Fig. 4 presents time series of key pollutants of the electricity sector. The figure is to illustrate possible trend analysis of pollution in physical units. The different pollutants show very similar trends which may be due more to the use of constant emission factors, applied to the same input and output indicators, than to actual emission patterns. The meaning of such data, be it for a particular sector or the whole economy, is limited, unless the emissions can be confronted with

P. Bartelmus / Ecological Economics 29 (1999) 155–170

166

Fig. 4. Emission into air from electricity generation, 1988 – 1995 ( × 103 metric tonnes). Source: NSCB (1998).

some kind of standards. At the international level, for instance, CO2 standards have been proposed at 1990 emission levels, or lower. At the national level, other emission standards might be set, reflecting safe absorption or otherwise (locally) ‘acceptable’ levels.

4.2. Cost internalization The SEEA goes a step further by costing the impacts on the environment. Accounting only for the depletion of economic assets, as for instance in case studies of the World Resources Institute (Repetto et al., 1989, Solo´rzano et al., 1991) can be criticized for neglecting or denying the truly environmental cost of production and consumption. Those costs are the result of external effects of economic activities on the environment, which in turn affect the quality of human life, if not life itself. Focusing on the immediate environment – economy interface, these externalities can be considered

as the loss of environmental services of waste absorption, resulting from the (over)use of natural capital by economic activities. As in the case of natural resource depletion, environmental externalities represent thus a form of capital consumption, neglected in conventional accounts. As such, they are economic costs, reflecting the need to maintain the capital stock of a country. The SEEA applies therefore a conservationist valuation method of maintenance or avoidance/prevention costing for weighting the emissions generated directly by production and consumption processes. ‘Maintenance costs’ are those that could have been avoided if appropriate technologies or protection measures would have been applied during the accounting period.17 17

These costs of environmental impacts, which occurred during the accounting period, should not be confused with actual costs incurred by economic agents responding to environmental effects. The cost of such responses which consists of expenses for environmental protection is discussed in Section 4.3.

P. Bartelmus / Ecological Economics 29 (1999) 155–170

167

Table 3 Environmental pollution costs in per cent of value added, 1988–1994

Agriculture and hunting Forestry and logging Aquaculture Mining and quarrying Manufacturing Cement a Water works and supply Transport b Total (of NDP)

1988

1989

1990

1991

1992

1993

1994

1.2 2.3 3.0 0.0 0.5 36.4 117.8 0.2 0.8

1.2 1.7 2.9 0.1 0.7 34.3 114.6 0.2 0.8

1.3 1.7 3.3 0.1 0.7 40.3 116.3 0.2 0.8

1.4 2.6 3.4 0.1 0.7 35.4 93.5 0.1 0.8

1.3 0.0 2.7 0.1 0.7 39.6 85.6 0.2 0.7

1.4 0.0 2.8 0.0 1.1 53.3 90.3 0.3 0.8

1.5 0.0 2.4 0.0 1.1 54.2 78.8 0.4 0.8

a

‘Potential emissions’, based on emission factors, include abated or prevented emission. Commercial trasport only. Source: NSCB.

b

Comparing the cost of depletion of natural resources with pollution/emission cost shows that the former are a multiple of the latter in the period of 1988–1991. Thereafter, both environmental cost categories converge to a relatively low level of around 1% of NDP (see Tables 2 and 3). This is due to the logging ban of 1992 which reduced significantly natural resource depletion in the country. The low and constant level of overall pollution cost deserves further scrutiny. It may be due to successful pollution control, undercoverage which has been the case in other SEEA studies — e.g. in the Republic of Korea (Kim et al., 1998) and Japan (Oda et al., 1998)— or overly optimistic estimates of pollution control costs. Aquaculture exhibits one of the highest costs of discharges, but the percentage refers to the total value added generated by fisheries for which no further emission is recorded. Water supply is a glaring example of pollution cost offsetting value added. The explanation might indeed be that this is an economic activity which is heavily ‘subsidized’ by Nature, offering much of its services for free despite considerable costs of depletion and degradation. Removal of this subsidy by charging consumers the full price, covering the estimated environmental cost, would be the appropriate policy response from an economic efficiency point of view. Weighting emissions with the unit value of environmental protection measures is, of course, hypothetical since the emissions did actually take place during the accounting period; in other words, the

emission costs were not actually internalized in the accounts or budgets of the responsible economic agents. However, these costs do provide an indication of the amount of environmental cost that should and could have been internalized if households and enterprises had behaved in an environmentally sound manner. Environmental cost accounts thus provide essential information about the level at which ‘economic instruments’ of cost internalization, such as effluent charges or tradable pollution permits, need to be set for the prevention of undesirable levels of emissions. PA 21 (1997) envisages a ‘‘mixture of market-based instruments and command-and-control measures… to set into motion financial flows that would help achieve [its] goals’’ (p. xxvii). Those instruments apply to both natural resource depletion (mining and forestry: p. 26) and pollution (air quality: p. 66, mine waste and tailings: p. 83). Actual experimentation with a wastewater discharge fee, based on BOD (biochemical O2 demand) loading, has begun under the auspices of the Laguna Lake Development Authority. A comparison of the hypothetical maintenance cost with actual levels of fees or effluent charges would provide an indication of how realistic these charges are with regard to inducing the implementation of environmental protection measures. Typically, fiscal instruments are good income spinners, succeeding indeed to ‘set into motion financial flows’, but are less successful in changing microeconomic production and consumption behaviour.

168

P. Bartelmus / Ecological Economics 29 (1999) 155–170

The reason is that the introduction of relatively high levels of taxation is politically difficult, and economic instruments are therefore usually set too low. One way around this dilemma is to offset ecotaxation by a reduction of income taxes. Textbook economics tells us that, for the optimal allocation of scarce resources, social cost internalization should refer to the actual damage, in terms of welfare or utility losses of environmental impacts, rather than the cost of preventing or mitigating these welfare effects. As already pointed out, the well-known measurement problems of utility and the willingness to pay for damage avoidance or compensation are the reasons why such valuations were not attempted in the Philippine SEEA application. Any comparison of actual environmental damage with the maintenance cost of potential damage avoidance should thus be regarded with a sound dose of skepticism. For example, one such calculation for the Philippines comes to the conclusion that the total maintenance ‘‘cost of reducing uncontrolled residuals to harmless levels through least-cost, available technology’’ exceeds environmental damage caused by pollution (delos Angeles and Peskin, 1998)—an invitation to inaction on the pollution front? Assessing the potential incidence of hypothetical maintenance cost in appropriate models of general equilibrium, notably the fixed-technology model of input–output analysis, is an altogether different issue. Environmental accounts can indeed provide the first-round internalization cost whose further effects on (shadow) prices, economic aggregates, patterns of production and final demand components could be usefully modelled. One overall outcome might thus be the calculation of hypothetical aggregates such as an ‘‘optimal net domestic product with regard to environmental targets’’ (Meyer and Ewerhart, 1998), or a ‘‘maximum NDP generated in an economy in which the burden on the environment is reduced to a sustainable level’’ (de Boer et al., 1994). Under certain, and possibly quite unrealistic, conditions of perfect competition, full substitution of production factors and optimal (resource use) behaviour, such modelling would indicate how both maximum output and long-

term sustainability of consumption can be achieved (Solow, 1974, Hartwick, 1977, Dasgupta and Ma¨ler, 1991). The actual use and usefulness of such modelling in economic and environmental policy making is a challenging task of further research and analysis.

4.3. Cost internalized: assessing en6ironmental protection Once environmental costs are actually internalized, they are in principle accounted for in standard concepts of cost (expenditure for environmental services bought or otherwise internally incurred), fees, charges or subsidies, and capital formation (acquisition of capital goods for environmental protection). Typically, a comprehensive survey of all economic agents needs to be undertaken to obtain this information. In the Philippines budgetary estimates are available from governmental institutions only, amounting to about 2.5% of total government expenditures in the average (1988–1994), according to NSCB estimates. Some scholars suggest that expenditures to mitigate or avoid environmental effects are ‘defensive’ in nature since they serve to maintain human welfare rather than to increase it. Environmental protection and other defensive expenses should therefore be deducted from GDP to obtain net economic welfare (NEW) (Samuelson and Nordhaus, 1992), or a genuine progress indicator (GPI) (Cobb et al., 1995). However, such deduction is questionable as it would draw national accounting into the murky waters of welfare measurement where ‘desirables’ (e.g. of leisure and environmental services) and ‘regrettables’ (environmental protection, health costs of pollution and indeed defense itself) are added or deducted. Such addition and deduction would change the production boundary of the national accounts in an arbitrary manner because it is hardly possible to obtain consensus on what is desirable or regrettable in society. Rather than deducting defensive expenditures in national accounts, input–output analyses could usefully explore the effects of anticipated or budgeted changes in environmental expenditures on

P. Bartelmus / Ecological Economics 29 (1999) 155–170

prices, production structures, employment and international competitiveness.

5. Outlook: from growth to development Integrated environmental and economic accounting, as implemented in the Philippines, allows the valuation of immediate environmental impacts of economic activities on natural assets in terms of resource depletion and emission of pollutants. Such accounting would reach its limits when attempting to value welfare effects on human health and other environmental concerns such as a cherished species like the Philippine eagle. While integrated accounting does define and assess a ‘more sustainable’ concept of economic performance and growth, the market-transaction based system cannot measure more remote aspects of the human quality of life or, in fact, ‘development’. Development goals of equity, health, literacy, freedom, culture or political stability are quite impossible to quantify in monetary terms unless one resorts to controversial methods of revealing and measuring individual preferences for these goals. The strategic objective of PA 21 (1997), to adopt ‘‘a new, comprehensive indicator of sustainable development’’ (p. 17), which would supplement environmental and natural resource accounting and other indices of income, product and human development, does not seem to be realistic from this point of view. For measuring comprehensively a concept of sustainable development, physical indicators related to the above-mentioned development goals would need to be developed. As those indicators are impossible to aggregate, given the lack of a common nume´raire, their policy relevance would have to be enhanced by linking them to explicit policy targets, thresholds or sustainability standards. Sustainability defined and measured above in terms of natural and produced capital maintenance is thus changed into a notion of compliance with standards and norms. In other words, market valuation is replaced by social evaluation, and the notion of sustainability by feasibility of development programmes (Bartelmus, 1994).

169

The explicit specification of standards and norms is not an easy task. Standards and targets may include standards of living, natural resource capacities, pollution and contamination standards, carrying capacities of bioproductive systems, distributional standards of income and wealth, and other cultural, political, social and demographic targets. In principle, capacities of the produced, human and natural capital stock (i.e. aspects of economic sustainability) could be combined by appropriate indicator systems with ecological sustainability limits of carrying capacity of natural systems. The purpose would be to bridge the above-described dichotomy of economic versus ecological approaches to growth and development. Together, these standards, thresholds and targets can be considered as a normative framework for environmental and socioeconomic action. PA 21 (1997) is a first step towards developing such a framework. In some instances, the national agenda already specifies concrete targets. Examples are the maintenance of six million ha of forests before 1998 (p. 36), the 100% satisfaction of forest product needs of rural communities by 2002 (p. 36), or the delineation of 2.5 million ha of productive forest for 1998–2005 (p. 39). However, most other ‘targets’ are still more anecdotal than operational in the sense of explicitly defining quantifiable milestones or limits. The development of an agreed system or list of indicators of sustainable development, linked unequivocally to targets and standards, is a challenging task of further research and political consensus building.

Acknowledgements Comments, contributions and data provided by Estrella Domingo and her colleagues of the National Statistical Coordination Board (NSCB) of the Philippines are gratefully acknowledged. I am also grateful to Cambridge University Press for permitting the partial reproduction (in Figs. 1 and 3) of data originally presented in Bartelmus (1997).

170

P. Bartelmus / Ecological Economics 29 (1999) 155–170

References Bartelmus, P., 1994. Environment, Growth and Development — The Concepts and Strategies of Sustainability. Routledge, London. Bartelmus, P., 1997. Whither economics: from optimality to sustainability. Environ. Develop. Econ. 2, 323–345. Bartelmus, P., 1998. The value of nature—valuation in environmental accounting. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 263–307. Commission of the European Communities (CEC), International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), United Nations, World Bank, 1993. System of National Accounts 1993. United Nations Sales Publication No. E.94.XVII.4. Cobb, C., Halstead, T., Rowe, J., 1995. If the GDP is up, why is America down? Atlantic Monthly 1995, 59–78. Dasgupta, P., Ma¨ler, K.-G., 1991. The Environment and Emerging Development Issues. Beijer Reprint Series No. 1. Beijer, Stockholm. de Boer, B., de Haan, M. and Voogt, M., 1994. What would net domestic product have been in an environmentally sustainable economy? Preliminary views and results. In: Statistics Canada (Ed.), National Accounts and the Environment: Papers and Proceedings from a Conference (London, 16 – 18 March 1994). Statistics Canada, Ottawa. de Bruyn, S.M., Opschoor, J.B., 1997. Developments in the throughput – income relationship: theoretical and empirical observations. Ecol. Econ. 20, 255–268. delos Angeles, M.S., Peskin, H.M., 1998. Philippines: environmental accounting as instrument of policy. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 95–111. Department of Environment and Natural Resources (DENR), United States Agency for International Development (USAID), International Resources Group IRG), 1991. The Philippine Natural Resources Accounting Project, Executive Summary. Department of Environment and Natural Resources (DENR), United Nations Development Programme (UNDP) and National Economic and Development Authority (NEDA), 1996. A Case Study on the Compilation of Natural Resource Accounts in the Philippines. Domingo, E.V., 1998. Philippines: adaptation of the United Nations system of environmental accounting. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 77–93. Doob, L.W., 1995. Sustainers and Sustainability: Attitudes, Attributes, and Actions for Survival. Praeger, Westport, CT. Foster, J. (Ed.), 1997. Valuing Nature? Ethics, Economics and the Environment. Routledge, London. Georgescu-Roegen, N., 1971. The Entropy Law and the Economic Process. Harvard University Press, Cambridge, MA. .

Hartwick, J.M., 1977. Intergenerational equity and the investing of rents from exhaustible resources. Am. Econ. Rev. 67 (3), 972 – 974. Jacobs, M., 1994. The limits of neoclassicism: towards an institutional environmental economics. In: Redclift, M., Benton, T. (Eds.), Social Theory and the Global Environment. Routledge, London. Ja¨nicke, M., Mo¨nch, H., Ranneberg, T., Simonis, U.E., 1989. Structural change and environmental impact. Intereconomics Jan.-Feb., 24 – 35. Kim, S.-W., Alfieri, A., Bartelmus, P., van Tongeren, J., Gudgeon, P., 1998. Pilot Compilation of EnvironmentalEconomic Accounts, Republic of Korea. Korea Environmental Institute, Seoul. Meyer, B., Ewerhart, G., 1998. Modelling towards eco domestic product. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 395 – 406. National Statistical Coordination Board (NSCB), 1998. Philippine Asset Accounts: Forest, Land/Soil, Marine Fishery, Mineral, and Water Resources. Oda, K., Arahara, K., Hirai, N., Kubo, H., 1998. Japan: the System of integrated Environmental and Economic Accounting (SEEA) — trial estimates and remaining issues. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 35 – 61. Repetto, R. et al., 1989. Wasting Assets, Natural Resources in the National Income Accounts. World Resources Institute, Washington, DC. Republic of the Philippines, 1997. Philippine Agenda 21: A National Agenda for Sustainable Development. Samuelson, P.A., Nordhaus, W.D., 1992. Economics, 14th ed. McGraw-Hill, New York. Solo´rzano, R. et al., 1991. Accounts Overdue: Natural Resource Depreciation in Costa Rica. Tropical Science Center, San Jose´ and World Resources Institute, Washington, DC. Solow, R.M., 1974. Intergenerational equity and exhaustible resources. Rev. Econ. Stud. Symposium, 29 – 46. Steurer, A., Gie, G., Leipert, C. and Scha¨fer, D., 1998. Environmental protection expenditure and its representation in national accounts. In: Uno, K. and Bartelmus, P. (Eds.), Environmental Accounting in Theory and Practice. Kluwer, Dordrecht, 309 – 319. United Nations, 1993. Integrated Environmental and Economic Accounting. United Nations Sales No. E.93.XVII.12. Uno, K., Bartelmus, P. (Eds.), 1998. Environmental Accounting in Theory and Practice. Kluwer, Dordrecht. van Tongeren, J., Schweinfest, S., Lutz, E., 1991. Integrated Environmental and Economic Accounting — A Case Study for Mexico. Environment Working Paper No. 50, The World Bank, Washington, DC. World Bank, 1997. Expanding the Measure of Wealth. The World Bank, Washington, DC. World Commission on Environment and Development, 1987. Our Common Future. Oxford University Press, Oxford.