A new system of sustainable accounting, known as Green Accounting, has emerged. “It permits the computation of income for a nation by taking into account the economic damage and depletion in the natural resource base of an economy.”
It is a measure of sustainable income level that can be secured without decreasing the stock of natural assets. This requires adjustment of the System of National Accounts (SNA) in terms of stock of natural assets. In SNA, allowance is made for capital consumption or man-made capital while calculating Net Domestic Product (NDP). Net Domestic Product (NDP) =GDP-depreciation.
System of National Accounts (SNA) has three main defects
(i) It neglects the depletion of natural capital such as farmland, forests, fishing stock, minerals, etc.,
(ii) Environmental degradation mainly from pollution, and
(iii) Defensive expenditures which the society incurs in facing the external effects of environmental degradation.
To overcome these drawbacks of SNA, the Statistical Division of UN has developed the System of Environmental Economic Accounting (SEEA). The SEEA focuses on:
(i) Accounting for the depletion of scarce natural resources, and
(ii) Measuring the costs of environmental degradation and its prevention.
Thus the computation of Green NDP (or EDP) has been replaced by a measure of national product which includes the economic cost of degrading natural resources which are required to produce goods and services directly and indirectly.
Objectives of Green Accounting
The objectives of green accounting are:
Segregation and Elaboration of all Environment related Flows and Stocks of Traditional Accounts
The segregation of all flows and stocks of assets related to environment permits the estimation of the total expenditure for the protection of the environment. A further objective of this segregation is to identify that part of the gross domestic product that reflects the costs necessary to compensate for the negative impacts of economic growth, that is, the defensive expenditures.
Linkage of Physical Resource Accounts with Monetary Environmental Accounts
Physical resource accounts cover the total stock or reserves of natural resources and changes therein, even if those resources are not affected by the economic system. Thus natural resource accounts provide the physical counterpart of the monetary stock and flow accounts of SEEA.
Assessment of Environmental Costs and Benefits
The SEEA expands and complements the SNA with regard to costing:
(a) The use (depletion) of natural resources in production and final demand;
(b) The changes in environmental quality, resulting from pollution and other impacts of production, consumption and natural events, on the one hand, and environmental protection, on the other.
Accounting for the Maintenance of Tangible Wealth
The SEEA extends the concept of capital to cover not only human-made but also natural capital. Capital formation is correspondingly changed into a broader concept of capital accumulation allowing for the use or consumption and discovery of environmental assets.
Elaboration and Measurement of Indicators of Environmentally Adjusted Product and Income
The consideration of the costs of depletion of natural resources and changes in environmental quality permits the calculation of modified macro-economic aggregates, notably an environmentally adjusted net domestic product (EDP).
Problems of Green Accounting
The SEEA method of calculating Green NDP is beset with a number of problems discussed below:
- SEEA does not include comprehensive natural resource accounting because regional natural resource accounts are not reflected in the main accounts of the SEEA.
- It focuses on the use of natural resource for economic activities and ignores the flows and transformations within the natural resources.
- The types of data needed for SEEA are not available in the necessary format. Thus lack of data has been one of the main problems in the SEEA.
- Another problem arises when environmental data are directly connected with data of existing national accounts for the preparation of the SEEA. They require assigning of environmental pollution loads to the appropriate economic activities. However, the costs of preventing pollution can only be determined if the causes of pollution are identifiable. But the causes of many types of environmental pollution are not clear. If there are several pollution factors which cause environmental damage, the assignment of this damage will be highly arbitrary.
- Another problem arises when some of the consequences of environmental pollution become visible after a long time. Estimating only the immediate consequences will lead to wrong policy decisions.
- Unlike the market prices used by the SNA, there is no simple justifiable valuation system for the SEEA. For different aspects of environmental problems, different valuation problems are used such as prevention and restoration costs and contingent evaluations based on surveys. There are mainly theoretical and arbitrary constructions in SEEA.
Preparation of SEEA or Green Accounting
Table1 shows the basic structure of SEEA or Green Accounting in the form of a matrix. It also explains the derivation of SNA aggregates in columns and rows from 1 to 4.
The explanation of columns of Table 49.1 is given below:
Production side covering output, intermediate consumption, consumption of fixed capital (CFC), net domestic product (NDP) and use of non-produced natural assets in production.
Rest of the world (ROW) account includes exports minus imports (X-M).
Final consumption (C).
Produced assets as a part of economic assets that have come into existence as output from processes. This includes not only tangible fixed assets but also intangible fixed assets such as mineral exploration. It includes net accumulation of produced assets and other changes in the volume of produced assets i.e., gross capital formation.
Non-produced economic assets are defined as non-financial assets that have come into existence in ways other than the process of production. This includes tangible non-produced assets like land and sub-soil assets. Intangible non-produced assets like patented entities, leases, and transferable contracts.
Records the effects of economic activities on non-produced natural assets such as air, water and virgin forests that are not included as economic assets in the stock of natural assets.
The explanation of rows of Table is given below:
It records the entries of opening stock of produced assets being the value of stocks of man-made capital produced and the value of stocks of natural resources, such as oil, gas and cultivated forests etc.
It records total domestic production and the value of imports.
Economic uses including elements of intermediate consumption, exports, final consumption expenditure and gross capital formation.
Consumption of fixed capital (CFC) also appears as a negative item. Therefore, Net Investment (I) = Gross Investment (Ig) -CFC.
Net domestic product (NDP) represents the elements that define the national income accounts identity between net domestic product (NDP) and expenditure categories:
Net Domestic Product (NDP) = Net exports (X-M) + Final consumption expenditure (C) + Net capital accumulation or Investment (I)
It includes the elements for the use of non-produced natural assets by depletion of economic natural assets and degradation of non-economic natural assets.
It relates to accumulation of non-produced natural assets which include change in stock of economic assets and reduction on natural assets relating to environment.
It relates to environmentally adjusted aggregates in monetary environmental accounting. These macro-economic aggregates of EDP = Net exports (X—M) + Final consumption (C) + Net accumulation of produced economic assets (NAp.ec) + Net accumulation of non-produced economic assets (NAnp.ec)-Net accumulation of non-produced natural assets (NAnp.n).