Sustainable development indicators at Macro Level: Green Accounting

1. Sustainable development indicators at Macro Level: Green Accounting

2. Indicators for Sustainable Development 1. Organizing one-dimensional indicators and how they can be used • PSR model of the UN • CSD indicator set for SD • Example indicators for SED 2. Overview over integrative indicators • Objective, definitions and purpose • Sustainable income • SEEA system • Economic welfare • Human welfare

3. Indicators • Quantify and Simplify phenomena • Inform and Alert about changes taking place in systems WARNING function • Their use / utility depends on the context • Should also be designed to help decision makers understand why change is taking place

4. 1. Organizing one-dimensional indicators

5. PSR (Pressure, State Response) Indicator Organizing Tool • This framework has formed the basis for ongoing developments of the Driving- Force- State- Response (DSR) and the Driving-Force, Pressure- State- Impact- Response (DPSIR) • Used e.g. in the UN indicator system • Indicators for sustainable energy development, now transformed to the CSD system

6. PSR Tool

7. PSR Tool

8. Condition of the Environment Human Activities that Influence the environment Response to Prevent / Reduce Negative Impact Adapted from: Pinter et al, UNEP, IISD & Ecologistics International, 1999

9. DSR:Driving Force - State - Response DPSIR: Driving Force - Pressure - State - Impact - Response Ongoing Development of PSR PSR:Pressure - State - Response

10. Pressure The pressures Human Society puts on the environment, as a result of: • human activities • trade, and consumption These activities, or Driving Forces, result in direct pressures on the environment such as: • pollution • resource depletion

11. State • Condition (typically of the environment) that results from the pressures, e.g. pollution levels, degree of land degradation or extent of deforestation • These changed conditions may, in turn, affect human health and well-being • One therefore needs an understanding of both the State of the Environment as well as the direct and indirect effects - or Impacts

12. Response Relates to actions taken by society either individually or collectively, to prevent or mitigate against negative environmental impacts, to correct existing damage, or, to conserve natural resources

13. Responses Include • Regulatory action & Instruments of Policy • Public opinion & consumer preference • Changed management strategies • Environmental or research expenditure • Provision of environmental information

14. Example: Indicators for Sustainable Energy Development • Energy is central to the three dimensions of SD: • Driver of macroeconomic growth • Prereq. for increased human welfare • Causes environmental stress

15. Importance • SED is a central component in the quest towards SD • Discussed in Stockholm, Rio and Johannesburg

16. CSD indicators for SD • Core set of 58 indicators with flexible adaptation at the national level • Description of themes and sub-themes • Methodology sheet for each indicator by lead agency • Guidelines for national implementation

17. CSD framework

22. CSD approach • Non-integrative • Multi-indicator approach • Others try to incorporate all into one index - one value.

23. 2. Overview over integrative indicators Objective, definitions and purpose Sustainable income SEEA system Economic welfare Human welfare

24. Integrated indicators CSD, PSR • Non-integrative • Multi one-dimensional indicator approach Integrated indicators • Incorporate two or more metrics within or between dimensions into one indicator • SNI, ISEW (between dimensions) • HDI (within human dimension) Multi-dimensional indicators • Incorporate more than one dimensions into one metric • Not necessarily composite • Often graphical displays of more than one dimension at a time

25. Distinction between various accounting concepts – what is the context?

26. Goals for National Accounting

27. Weak vs. Strong Sustainability • Weak sustainability • Contain the sum of man-made and natural capital • Sum non-declining • Requires pricing of natural capital • Assumes substitutability between man-made and natural capital • Depletion of natural capital can be offset by creation of man-made capital • “Consumption may be held constant in the face of exhaustible resources only if the rents deriving from the inter-temporally efficient use of those resources are reinvested in the reproducible capital.” (Hartwick rule)”

28. Strong sustainability Strong sustainability • Separate sum of Man-made and natural capital non-declining • Total stock of man-made capital non-declining • Total stock of natural capital non-declining • Assumes very little substitutability between man-made and natural capital Planning • Limit human scale • Technological change must be efficiency increasing • Use of NC must be sustainable • Use of RNC cannot exceed regeneration • Do not exceed waste assimilative capacity • Non-renewable NC?

29. Goals for National Accounting

30. Marketed • GNP • NNP = GNP - depreciation • NNP’ = NNP - depreciation of natural capital (or income*user cost ratio) • El Serafy • User cost ratio: 1-X/R = (1/(1+r)^n+1) X: true income R: net revenue n: life expectancy r: discount rate Describes fraction that cannot account as income – due to depletion of resources (or natural capital), fraction subtracted from income

31. NNP’ - example • Lifetime 10 years • r = 5% • User cost ratio: = (1/(1+0.05))^11 Interpretation? Higher discount rate?

32. Economic Income • Weak sustainability: • Sum of all capital non-declining • Measures: • ENNP, SEEA • ENNP = NNP - ED - DS • Where: • ED = Value of current environmental damage • Subtract from income (e.g. added cost due to water pollution) • DS = Depreciation of natural capital, using user cost e.g. Value of changing the size of the stocks. • Smaller stocks, less sustainable

33. Economic Income • Strong Sustainability • Human, man-made and natural capital must separately be non-declining. • Metric: • Sustainable national income (SNI) • SNI = NNP - replacement cost for all non-sustainable use of natural capital. • SEEA

34. Sustainable National Income (SNI) Income that can be sustained each year – implies sustainable use of resources • Replacement cost: The cost of restoring natural capital to its “sustainable” state using damage curves • Sustainable state - Examples: • Fisheries, where recruitment=deaths • Soils, where regeneration=erosion • Acidification, critical load =>defines a sustainability standard

35. Damage Curves Damage curves describe the marginal cost of reducing environmental burdens to the sustainability standard - or to its original state. How created? • Based on shadow prices of environmental functions • Environmental functions defined (e.g. regeneration of a fish stock) • Environmental burdens defined (e.g. Fishing, thermal pollution to the ocean) • What affects the functioning of the environment • Sustainability standard defined • How much burden the environment can take and still be sustained

36. SNI Process • Quantify the environmental burden • Compile the standards to the environmental burdens • Formulate measures necessary to meet those standards - how can we reduce the burdens • Estimate cost curves associated with implementing those measures • Total the costs • Deduct from national income

37. SNI Issues • Estimates not based on preferences • Estimate static • Does not indicate state of environment • Technological change not accounted for e.g. • Irreversible losses cannot be quantified • Very time-consuming • Hard to define the sustainability standard

38. SEEA • System of integrated Economic and Environmental Accounting • Satellite Accounting to conventional income accounts • Focus on natural capital – not human or social capital • Two main issues: • 1. Requires the description of environment in physical terms. A distinction has to be made between natural and manmade assets. Natural assets consists of biological assets, land and water areas with their ecosystems, subsoil assets and air.

39. SEEA Two main issues: • 2. Requires the valuation of natural assets. • Natural assets provide both marketable and non-marketable services and therefore their valuation requires the use of market and non-market valuation techniques.  • Also it is not possible to value all ecosystem functions of natural assets that are described in the physical accounts that show the economy and environment inter-linkages.  

40. SEEA • Contains: • Physical flow accounts • Accounts that link physical and monetary data (hybrid accounts) • Environmental protection and resource management accounts • Natural resource asset accounts • Both monetary and physical • Environmentally adjusted macroeconomic indicators

41. SEEA • Physical flow accounts • Four kinds of flows • Products • Natural resources (minerals, energy, soil, water, biological material) • Ecosystem inputs (support services) • Residuals (waste) • Two spheres • Economic • Environmental

42. SEEA • Hybrid accounts • Simultaneous display of monetary and physical accounts • Easy comparison where pollution is coming from e.g. • I-O framework

43. SEEA • Environmental protection and resource management accounts • Disaggregation of data from the conventional accounts on environmental protection expenditures • E.g. Pollution prevention, management of natural resources • Can view where environmental costs are the highest – compared to economic output • Framework created by Eurostat

44. SEEA • Natural resource asset accounts • Both physical and monetary • Excludes many ecosystem services • Difficult to define ownership • Accumulation accounts, balance sheets • State at time t, again at time t+1 • Fisheries, forestry, water, subsoil, land • Critique: difficult to do when market prices do not exist

45. SEEA • Environmentally adjusted asset accounts • Combining the metrics • Subtracting loss in natural resources and damage to the environment from conventional income

46. Economic Welfare • Two main metrics: • Measure of economic welfare (MEW) • Nordhaus and Tobin • Indicator of Sustainable Economic Welfare (ISEW), Now called GPI (genuine progress indicator) • Daily and Cobb

47. ISEW • Adjust GNP: • Adjusts for income distribution • Multiply by the index of income distribution - as given by the Gini Coefficient as (1-gini) • Gini from 0-1, 5 income groups - measures distribution between them. 0= perfect, 20% each of income

48. Gini

49. ISEW • Includes value of household work and non-market activities (add) • E.g. measures as time*wages per hour per domestic workers • Services of household capital (durability - add) (new purchase drives up GDP) • Services of government capital (add) • Only services from highways and streets (7.5% of net stock) • Adjusts for loss in leasure time (subtract) • Since 1969

50. ISEW • Cost of underemployment (subtract) • Cost of commuting (subtract) • Cost of personal pollution control (subtract) • Cost of automobile accidents (subtract) • Depreciation of active natural capital • Cost of water pollution (quality, siltation) • Cost of air pollution • E.g. reduction in yield • Damage to materials • Reduction in property values • Loss in visibility • Cost of noise pollution