Chapter 19: Accounting for the environment

1. Chapter 19: Accounting for the environment 19.1 Environmental indicators and state of the environment reporting 19.2 Environmental accounting: theory 19.3 Environmental accounting: practice 19.4 Wealth and genuine saving 19.5 Sustainable development indicators

2. Environmental indicators and state of the environment reporting: terminology ‘Environmental indicators’/’Environmental statistics’ - biophysical data organised around environmental issues ‘State of the environment report’ – a compilation of environmental indicators/statistics For the USA see Table 19.1 for EPA coverage: go to http://www.epa.gov/roefor the EPA’s SOER For the UK see Table 19.2 for DEFRA coverage: go to http://www.defra.gov.uk/environment/statistics, and see also The environment in your pocket published by DEFRA. ‘Environmental accounting’ – monetary, sometimes biophysical, data organised around economic categories

3. An almost practical step toward sustainability An almost practical step toward sustainability is the title of a lecture given in 1992 by Robert Solow. Based on the analysis of a simple model economy with Q=KαRβ with α+β=1 and β< α, Solow advanced two ‘key propositions’: 1.‘properly defined net national product’ ‘measures the maximum current level of consumer satisfaction that can be sustained forever’ so it is ‘a measure of sustainable income’ 2.‘Properly defined and properly calculated, this year’s net national product can always be regarded as this year’s interest on society’s total stock of capital’ Putting these together gives a rule for sustainability as constant consumption 3.Maintain the total stock of capital by consuming only the interest on it In the simple model analysed, this implies adding to the stock of reproducible capital, K, an amount equal to the depreciation of the stock of the non-renewable resource, R. With depreciation measured as the Hotelling rent arising in extraction this is Hartwick’s Rule.

4. Two important hedges For Hartwick’s rule to work in practice, the prices used have to be the ‘right’ ones, ie to reflect perfect foresight, as eg with the rent evolving according to the Hotelling Rule. According to Solow it is Obvious that everyday market prices can make no claim to embody that kind of foreknowledge. Least of all could the prices of natural resource products…..The hope has to be that a careful attempt to average out speculative movements and to correct for other the other imperfections I listed earlier would yield adjusted prices that might serve as rough approximations to the theoretically correct ones….The important hedge is not to claim too much. There is another ‘hedge’ to be examined shortly. The ‘right’ prices are those that go with a constant consumption path. They are not those that hold along the optimal path unless that involves constant consumption, which it will not given standard assumptions.

5. A resource owner in a competitive economy 1 B is the size of the bank account, units £s C is consumption expenditure, units £s W is total wealth, units £s R is the total of permit sales, units tonnes X is the size of the remaining stock of mineral, units tonnes h is the price of a permit, £s per tonne V is the value of the mine, units £s i is the interest rate, assumed constant over time Bt – Bt–1 = iBt–1 + (1 + i)ht–1Rt–1 – Ct (19.2) Vt = ht(Xt–1 – Rt–1) (19.3) ht = (1 + i)ht–1 so Vt = (1 + i)(Vt–1 – ht–1Rt–1) (19.4) or Vt – Vt–1 = iVt–1 – (1 + i)ht–1Rt–1 (19.5) Then (19.2) and (19.5) in Wt – Wt–1 = (Bt – Bt–1) + (Vt – Vt–1) (19.6) gives Wt – Wt–1 = iWt–1 – Ct (19.8) where Wt = Wt-1 implies Ct = iWt–1 (19.9) and Ct = iW0 (19.10) is the maximum constant consumption stream

6. Given that PV of x forever is x/i Ct = iW0 (19.10) forever gives W* = W0 (19.11) Income is Yt = iBt–1 + (1 + i)ht–1Rt–1 (19.12) For Wt = Wt-1 Ct = iBt–1 + iVt–1 for which It = Yt – Ct = iBt–1 + (1 + i)ht–1Rt–1 – iBt–1 – iVt–1 = (1 + i)ht–1Rt–1 – iVt–1 (19.13) which by (19.5) is It = –(Vt – Vt–1) (19.14) which is Hartwick’s rule. A resource owner in a competitive economy 2 B is the size of the bank account, units £s C is consumption expenditure, units £s W is total wealth, units £s R is the total of permit sales, units tonnes X is the size of the remaining stock of mineral, units tonnes h is the price of a permit, £s per tonne V is the value of the mine, units £s i is the interest rate, assumed constant over time

7. For sustainable income as what can be consumed without reducing wealth Ysus,t = iWt–1 (19.15) which is Solow’s ‘properly’ measured income – the level of consumption that can be maintained forever and the interest on wealth. Would a resource owner choose constant consumption? It depends. In 11.4.1 it was established that a necessary condition for maximising the discounted sum of utilities over time, subject to consumption equal to the change in wealth, is (in the notation used here) Uct/Uct-1 = (1+ρ)/(1+i) so that ρ<i implies Uct<Uct-1 implies Ct>Ct-1 ρ=i implies Uct=Uct-1 implies Ct=Ct-1 ρ>i implies Uct>Uct-1 implies Ct<Ct-1 given the assumption of diminishing marginal utility. A resource owner in a competitive economy 3

8. Optimal and sustainable consumption paths 1 For a representative agent closed model economy where Qt=KαtRβt : α + β = 1 and β<α C0t is the optimal path CS0 is the highest feasible level of constant consumption at t =0 CSt is the time path under the optimal plan for the maximum level of constant consumption that would thereafter be sustainable indefinitely – at T, COT is optimal and CST is maximum sustainable consumption from T onwards, given that the optimal path was followed up to T. Figure 19.1 Optimal and sustainable consumption paths

9. Optimal and sustainable consumption paths 2 At T, having followed the optimal path, C0T is not sustainable. The maximum constant consumption level from T on would be CST. Using the prices and quantities from the optimal path will not generally give correct signals about the future level of sustainable income. To get the right signals it is necessary to use the prices and quantities that hold at T on the path CST. Figure 19.1 Optimal and sustainable consumption paths

10. Measuring national income: theory 1 Consumption is the purpose of economic activity, so why is the National Income measure of economic performance defined as consumption plus investment? Because current investment contributes to future consumption. For Max St is a function of current levels of the variables consumption and investment that gives a single valued measure of performance in terms of the objective function.

11. Measuring national income: theory 2 UC is the marginal utility of consumption. For a linear utility function so that U(Ct) = UCCt, and using It for the change in the size of the capital stock, this is UCCt + UCIt a performance measure in utils. Dividing through by UC gives the performance measure NDPt = Ct + It (19.17) where NDP is Net Domestic Product, also known as NNI for Net National Income. From (19.17), NDPt – Ct = It so that Ct>NDPt implies It<0, which implies Kt+1<Kt and Qt+1<Qt. For sustainable income as the maximum that can be consumed without reducing the size of the capital stock, NDPt is sustainable income.

12. Measuring national income: theory - taking account of the environment 1 The adjustments to the measurement of national income required on account of economy-environment interdependence are derived by considering optimal growth models where the specification of the constraint set reflects the nature of the interdependence. For the model which is the basis for Fig 19.1 – production uses a costlessly extracted non-renewable resource – the result is EDPt = NDPt – QRtRt = NDPt – htRt (19.18) where EDP stands for Environmentally Adjusted Domestic Product, QRt is the marginal product of the resource in production, Rt the amount used, and ht the Hotelling rent. The second term on the rhs is the depreciation of the resource stock. With NDPt = Ct + It, (19.18) is EDPt = Ct + It – htRt so that for total net investment zero, It = htRt, the Hartwick Rule, consumption is equal to sustainable income.

13. Measuring national income: theory – taking account of the environment 2 For a model where the extraction of the non-renewable is costly, and new reserves can be established at cost, EDPt = NDPt – (QRt – GRt)(Rt – Nt) = NDPt – ht(Rt – Nt) (19.20) where QRt is the marginal product of the resource in production, GRt is marginal extraction cost, and Nt is additions to the known stock. For a model where the resource input is a renewable EDPt = NDPt – (QRt – GRt)(Rt – F{St}) = NDPt – ht(Rt-F{St}) (19.21) where GRt is the marginal cost of harvesting, F{St} is the stock’s growth function, and St stock size. For sustainable yield exploitation, Rt = F{St} and there is no depreciation – EDPt = NDPt

14. Measuring national income: theory – taking account of the environment 3 Renewable resources, such as forests, can yield amenity services direct to consumption as well as provide inputs to production. EDPt = NDPt + (USt/UCt)St – ht(Rt – F{St}) (19.22) where USt is the marginal utility of standing timber and UCt is the marginal utility of produced commodity consumption. Typically USt is unobservable, there is no market price. Chapter 12 methods are needed. -------------------------------------------------------------------------------------- These models are not mutually exclusive – production uses non-renewables, renewables, flow resources. Production and consumption generate waste flows. The environment provides amenity and life support services. A comprehensive model needs to capture all such linkages.

15. Environmental accounting: practice It is generally agreed that, leaving aside environmental considerations, the proper measure of economic performance is Net Domestic Product, NDP, which is Gross Domestic Product, GDP, less the depreciation of reproducible capital. In fact, GDP is more widely used than NDP. This is, largely, because it is difficult to measure the depreciation of reproducible capital. Environmentally driven criticism of current accounting conventions focuses on three issues Natural resource depletion - should be treated in the same way as depreciation of reproducible capital – measurement and valuation problematic Environmental degradation – air, water and land quality reductions should be treated as depreciation – how to measure degradation from what benchmark? Defensive expenditure – , eg clean-up costs,on the environment should be deducted – why not other defensive expenditure?

16. The UNSTAT proposals: satellite accounting 1 System of integrated Environmental and Economic Accounting, SEEA Balance Sheets and Satellite Accounts (19.23) Environmental Cost is the change in the balance sheet value, i.e. depreciation, of all environmental assets, natural capital. Environmentally Adjusted NDP could be defined as EDPt ≡ NDPt – ECt ≡ (GDPt – DMt) – DNt (19.24) where DNt ≡ ECt

17. The UNSTAT proposals: satellite accounting 2 SEEA does not envisage national statistical agencies reporting EDP instead of GNP/NDP. SEEA does envisage complementing the current GDP/NDP accounts with balance sheets for natural capital – Satellite Accounts. Some counties do this already for a limited range of environmental assets – some of those commercially exploited – eg fossil fuels, minerals, timber. Even in these cases, measurement of depreciation is problematic, mainly on account of difficulties with unit valuation. SEEA does not envisage treating defensive expenditures as part of EC. It does recommend identifying and reporting environmental defensive expenditures within the accounting system.

18. The depreciation of non-renewable resources The correct measure of the depreciation of a stock of a non-renewable resource is D = THR = (P – c)(R – N) (19.25) where D is depreciation THR is total Hotelling rent P is the price of the extracted resource c is the marginal cost of extraction R is the amount extracted N is new discoveries In a fully competitive economy would have: THR = CIV with CIV for Change in (market) value of the resource stock. Generally, CIV is not observable. Nor is marginal cost, c.

19. Methods used for measuring the depreciation of non-renewable resources Net Price II D = (P – C)(R – N) (19.26) C for average cost, c>C Net Price I D = (P – C)R Change in Net Present Value (19.27) Given C rather than c, an estimate of CIV. El Serafy’s (user cost) rule D = R(P – C)/(1+r)T (19.28) In (19.27) and (19.28), r is the interest rate, and T is deposit lifetime

20. Measuring non-renewable depreciation - applying four methods to the same data Year El Serafy rule Net price I Net price II ABS NPV change 1988/89 952 8511 1989/90 1228 9872 –19321 – 6500 1990/91 1922 12023 –147035 –19900 1991/92 2328 13624 299075 –9700 Table 19.3 Alternative estimates of minerals depreciation for Australia 1988/9 to 1991/2, ASS$ x 106 Total of depreciations calculated for 33 minerals, using data from ABS (1995). r = 7.5%.

21. UK asset values £billion end year Oil Gas Oil+Gas Non-financial Assets Residential Buildings 1999 46.964 30.495 77.459 3877.5 1848.9 2000 53.611 43.011 96.622 4245.1 2106.5 2001 51.812 50.451 102.263 4484.8 2267.8 2002 50.883 46.566 97.449 5076.8 2737.1 2003 53.045 44.250 97.295 5522.2 3054.9 2004 78.536 50.754 129.29 6069.0 3427.0 2005 100.192 65.402 165.594 6283.0 3555.0 2006 120.921 69.439 190.36 6863.1 3915.3 2007 177.891 68.340 246.231 7380.0 4313.6 Table 19.4 UK asset values 1999 - 2007 Source: Office of National Statistics 2008a 2007 - oil and gas less than 5% of Non-financial Assets, less than 10% of Residential Buildings

22. Oil and gas deprecation in the UK Figure 19.2 Oil and gas depreciation for the UK 2000-2007 Derived from data on year end asset value – ONS 2008a

23. Australian asset values $billion 30th June 2002 2003 2004 2005 2006 Total NFA 4004 4435.9 5014.8 5391.4 5876.7 Produced 2150.0 2291.5 2482.5 2702.1 2932.9 Machinery and equipment 346.9 352.3 361.2 382.6 409.3 Dwellings 812.4 892.5 991.6 1086.2 1172.1 Non-produced 1854.7 2144.3 2532.3 2689.3 2943.8 Land 1639.8 1920.4 2284.0 2417.7 2633.3 Subsoil 204.9 213.6 237.2 260.2 298.8 Forest 1.9 2.0 2.1 2.2 2.2 Table 19.5 Australian asset values 2002 - 2006 Source: ABS 2008. NFA – non-financial assets Subsoil – all economically significant non-renewable and mineral resources, valued using the present value method – about 5% of NFA, less than Machinery and equipment, Dwellings Forests are native forests, plantations get counted as produced assets. Both valued at commercial value of standing wood.

24. Environmentally adjusted national income - Indonesia Year GDP Index EDP Index EDP/GDP 1971 1 1 1.20 1972 1.09 0.90 0.99 1973 1.22 0.97 0.96 1974 1.32 1.48 1.36 1975 1.38 0.98 0.85 1976 1.47 1.12 0.92 1977 1.60 1.08 0.81 1978 1.73 1.19 0.78 1979 1.83 1.19 0.78 1980 2.01 1.28 0.76 1981 2.17 1.48 0.82 1982 2.22 1.58 0.86 1983 2.32 1.49 0.78 1984 2.44 1.68 0.83 The first attempt to do this? By the World Resources Institute, using their estimates with official GDP estimates. Depreciation for: Oil – Net Price II Timber – Net Price II allowing for growth Soil – physical loss valued using loss of agricultural output The results are dominated by changes in the price of oil, and new discoveries of oil – EDP rose by 51% 1973 to 1974 Source: Based on Repetto et al (1989)

25. Environmentally adjusted national income - UK 2001 2002 2003 2004 2005 2006 2007 GDP 1021828 1075564 1139746 1200595 1252505 1321860 1401042 -FCC 115796 121914 125603 135184 138520 147858 158143 =NDP 906032 953650 1014143 1065411 1113985 1174002 1242899 -DEPCTN -5641 4814 154 -31995 -36304 -24766 -55871 =EDP 911673 948836 1013989 1097406 1150289 1198768 1298770 GDP growth 5.3% 6.0% 5.3% 4.3% 5.5% 6.0% NDP growth 5.3% 6.3% 5.1% 4.6% 5.4% 5.9% EDP growth 4.1% 6.9% 8.2% 4.8% 4.2% 8.3% Table 19.7 UK GDP, NDP and NDP adjusted for oil and gas depreciation Source: derived from ONS 2008b. FCC – Fixed Capital Consumption, depreciation of reproducible capital DEPCTN – end year to end year balance sheet changes for Oil+Gas These are current value figures – no adjustment for inflation

26. Environmentally adjusted national income - Australia 2001/2 2002/3 2003/4 2004/5 2005/6 GDP 735714 781675 840285 896568 965969 -FCC 115259 121526 127754 134523 145476 =NDP 620455 660149 712531 762045 820493 -ADJSTMNT 1317 865 894 87 234 =EDP 619138 659284 711637 761958 820259 Growth rates GDP 6.7% 6.2% 7.5% 6.7% 7.7% NDP 6.6% 6.4% 7.9% 6.9% 7.7% EDP 6.5% 6.5% 7.9% 7.1% 7.7% GDP pc 5.0% 5.6% 6.0% 6.3% Table 19.8 Australian GDP, NDP and NDP after net depletion adjustment While the Australian statistical agency, ABS, does not adjust the national income estimates in its main publications, it did do that in Year Book Australia 2008. Units are millions of current AUS$. FCC – Fixed Capital Consumption ADJSTMNT – the ‘net depletion adjustment’ which is subsoil (fossil fuels and minerals) extraction plus land degradation less subsoil additions Source: ABS 2008.

27. Wealth and genuine saving 1 EDPt = Ct + IRt + DNt (19.29) So EDPt > Ct for (IRt + DNt) > 0 EDPt = Ct for (IRt + DNt) = 0 EDPt < Ct for (IRt + DNt) < 0 so that maximum consumption consistent with not running down the capital stock is Ct = EDPt, so that EDPt is sustainable income Sustainable development requires Ct ≤ EDPt (19.30) Ct = EDPt implies that IRt and DNt are equal and of opposite sign so that (IRt + DNt) = 0.

28. Wealth and genuine saving 2 With KRt for reproducible capital and KNt for natural capital we can write Wt = KRt + KNt (19.31) where W stands for wealth as the aggregate capital stock. For Wt+1 we can write Wt+1 = (KRt + IRt) + (KNt + DNt) so that Wt+1 - Wt = IRt + DNt which by equation 19.29 is Wt+1 - Wt = EDPt - Ct (19.32)  so that Wt+1 - Wt ≥ 0 if Ct ≤ EDPt. Hence, Wt+1 - Wt ≥ 0 (19.33) is equivalent to the expression 19.30 as a test for sustainable development. Wt+1 - Wt is what is now widely known as 'genuine saving' or 'genuine investment' for period t.

29. Theory for an imperfect economy 1 The earlier theory supporting EDP as the proper measure of national income was derived for an optimising economy. Dasgupta (2001),for example, argues that non-negative genuine saving/investment is a test for sustainable development that does not require the optimising assumption. For constant population, social well-being at is (19.35) A consumption stream beginning at t = 0 is said to to correspond to a sustainable development path if at t Vt+1 ≥ Vt, see Appendix 19.3, is equivalent to (19.36) where and pit is the accounting price for asset i Is Genuine saving Is Change in asset i

30. Theory for an imperfect economy 2 • The accounting price for asset i is the change in Vt consequent on an infinitesimally small change in the size of i at t, other things equal. • Accounting prices depend upon four related factors: • the conception of social well-being, • the size and composition of existing stocks of assets, • production and substitution possibilities among goods and services, and • the way resources are allocated in the economy. ( Dasgupta 2001 p 123) • The price of getting away from results based on the assumption of optimisation is the assumption that the accountant can forecast all of the utility consequences of small perturbations in all relevant asset stock sizes through to the distant future. • And, no differences in the conception of social well-being?

31. Problems with genuine saving as a sustainability test 1 Clearly, no accountant could could have the information for a comprehensive measure of genuine saving. The implicit claim must be that aggregating over a wider range of assets using estimates of accounting prices will produce a better guide to policy than looking just at investment in reproducible capital. While plausible, this is not generally true – looking at an extended but incomplete range of assets may produce a result further from the truth. Genuine savings/investment results need to be treated with caution as tests for sustainable development and guides to policy.

32. Table 19.9 Numerical example for incomplete genuine saving accounting Source: Common 2007b Problems with genuine saving as a sustainability test 2 Time Time Time Time Time Time KR KR KR KR KR KR W W W W W W Time 0 0 0 0 Time 0 0 KR 100 100 100 100 100 KR 100 1000 1000 1000 1000 1000 1000 100 100 100 100 100 100 100 100 100 100 100 100 500 500 500 500 500 500 100 100 100 100 100 100 100 100 100 100 100 100 2000 2000 W 2000 2000 W 2000 2000 1 0 1 1 1 1 0 1 100 102 102 102 102 100 102 102 1000 950 1000 950 950 950 950 950 100 101 101 100 101 101 101 101 101 101 101 100 101 101 100 101 500 550 550 550 500 550 550 550 110 110 100 110 100 110 110 110 100 120 120 120 120 120 120 100 2034 2034 2034 2000 2000 2034 2034 2034 1 1 Change Change Change Change Change Change 2 2 2 102 2 102 2 2 -50 -50 950 -50 -50 -50 950 -50 1 1 101 1 101 1 1 1 1 1 101 1 1 1 1 101 50 550 550 50 50 50 50 50 10 10 10 110 10 10 110 10 20 20 20 20 120 20 120 20 34 34 2034 2034 34 34 34 34 Change Change 2 2 -50 -50 1 1 1 1 50 50 10 10 20 20 34 34 KR KR KR KR KR KR We We We We We We 0 0 0 0 0 0 KR 100 KR 100 100 100 100 100 1100 1100 1100 1100 1100 1100 50 50 50 50 50 50 50 50 50 50 50 50 We 1300 1300 1300 1300 1300 1300 We 0 1 1 1 1 1 0 1 100 102 102 102 102 102 102 100 1000 1000 1000 1000 1000 1000 1100 1100 51 51 50 51 51 51 51 50 50 51 51 50 51 51 51 51 1204 1204 1204 1204 1204 1204 1300 1300 1 Change Change 1 Change Change Change Change 2 2 102 2 102 2 2 2 -100 1000 -100 1000 -100 -100 -100 -100 1 1 51 1 1 1 51 1 1 1 1 51 1 1 1 51 1204 -96 -96 1204 -96 -96 -96 -96 Change Change 2 2 -100 -100 1 1 1 1 -96 -96 Table 19.9 Numerical example for incomplete genuine saving accounting Actual genuine saving is 34 Looking just at reproducible capital says 2 Measured genuine saving is –96 - opposite sign to actual.

33. World Bank estimates of genuine saving In World Bank (2006), for each country Genuine saving = Gross Saving(GNI less private and public consumption, plus foreign transfers) -Depreciation of reproducible capital(replacement value) + Educational expenses(public sector operating expenses) -Depletion of natural resources (energy, minerals and forest depletion using Net Price I) -Pollution damages (CO2 damages at $20 per tonne carbon emission) It is noted that ‘we should be cautious in interpreting a positive genuine saving rate’ as ‘There are some important assets omitted from the analysis’. A negative genuine saving rate should also be interpreted cautiously.

34. % World Bank - Genuine saving and income Vertical axis is % of GNI 1970 1975 1985 1995 2004 Figure 19.3 Genuine saving by income group

35. % World Bank - Genuine saving in world regions Vertical axis is % of GNI For the world, genuine saving is around 10% over 1974-2004 Middle East and Africa strongly influenced by oil and gas extraction, and price changes for such. Results here consistent with rents being consumed, rather than invested in reproducible capital. 1974 1980 1990 2004 Figure 19.4 Genuine saving for selected regions and the world

36. World Bank – total wealth and its components Income group Produced capital Natural capital Subsoil Timber NTFR Cropland Pastureland Protected areas Total Low 1174 325 109 48 1143 189 111 1925 Middle 5347 1089 169 120 1583 407 129 3496 High OECD 76193 3825 747 183 2008 1552 1215 9531 World 16850 1302 252 104 1496 536 322 4011 Table 19.11 Asset values for income groups and the world, $ per capita Source: World Bank 2006 Per capita asset values increase with income Ratio of produced to natural capital value increases with income Share of natural capital as agricultural land decreases with income Share of subsoil assets in natural capital increases with income

37. Accounting for international trade 1 Consider 2 trading economies, 1 and 2. Let x12 be exports from 1 to 2, and x21 be exports from 2 to 1. Let y represent total output, and f represent final demand, comprising c for consumption and s for saving/investment. We can then write: y1 = x12 + c1 + s1 = x12 + f1 (19.37) y2 = x21 + c2 + s2 = x21 + f2 If we define coefficients q12 = x12/y2 and q21 = x21/y1, equations 19.37 can be written as y1 = 0 + q12y2 + f1 y2 = q21y1 + 0 + f2 which in matrix notation, using upper case letters for matrices and lower case for column vectors, is y = Qy + f with the solution   y= (I - Q)-1f= Lf(19.38)  where I is the identity matrix.

38. Accounting for international trade 2 Now, let D1 = DM1 + DN1 = dm1y1 + dn1y1 = z1y1 D2 = DM2 + DN2 = dm2y2 + dn2y2 = z2y2 where M and m subscripts refer to human made capital and N and n subscripts refer to natural capital, so that we can write for total global depreciation D = z1y1 + z2y2 or, in matrix notation D = z’y (19.39) where z’ is [z1 z2]. Substituting for y in Equation 19.39 from Equation 19.38 gives D = z’Lf or T = ZLF (19.40) where Z and F are matrices with the elements of z and f along the diagonals, and zeroes elsewhere. For the two country case, Equation 19.40 is:

39. Accounting for international trade 3 T = ZLF where Z and F are matrices with the elements of z and f along the diagonals, and zeroes elsewhere. For the two country case In the matrix T the row elements give depreciation in a country arising by virtue of final demand in that and other countries, while column elements give depreciation in all countries by virtue of final demand in one country. So, row sums, DiIN , give depreciation in i, and column sums, DiATT, give depreciation attributable to i. Thus, in the two-country case here t11 + t12 is the depreciation of total capital actually taking place in country 1, while t11 + t21 is the depreciation of capital in the global economy that is on account of, attributable to, final demand in country 1.

40. Accounting for international trade 4 A slight extension of the method of Proops and Atkinson allows for consideration of these issues on a per capita basis. Let P be the matrix with the reciprocals of population sizes along the diagonal and zeroes elsewhere. Then, for the two-country case, A = TP = ZLFP (19.41) is so that column sums from A, diATT, give depreciation in all countries attributable to per capita final demand in country i. And, B = PT = PZLF (19.42) is so that row sums from B, diIN, give per capita depreciation in country i on account of global final demand. These depreciation measures can be compared with si, per capita saving in i.

41. Per capita saving and depreciation by region (si-diIN) - (s-d) US$ 1980 1982 1984 1986 1988 W.Europe 570 341 344 522 764 USA 153 -200 38 -429 -401 Africa -102 -68 -113 -140 -238 Middle East -578 853 -1024 -1135 -978 s - d 173 76 106 109 220 (si-diATT) -(s-d) US$ 1980 1982 1984 1986 1988 W.Europe 440 249 306 528 754 USA 48 -271 -141 -613 579 Africa -102 -79 -119 -146 -246 Middle East 238 -273 -708 -950 -779 Some entries from Table 19.11 Excesses of per capita saving over depreciation – difference from global excess In natural capital only nonrenewables accounted for here. For the world as a whole, genuine saving positive Looking at things on the attributable basis does not much alter the general picture Africa’s contribution always negative Mid East usually negative Takes no account of ability to save – income levels.

42. Sustainable development indicators 1 Sustainable development indicators – efforts by official agencies, and others, to provide data on the natural environment and the economy relevant to sustainable development, other than via modified national income or wealth accounting. 1994 – UK government adopted strategy for sustainable development 1996 – began publication of indicators to monitor progress Sustainable development indicators in your pocket (DEFRA) is organised around four ‘priority areas’ ( see also DEFRA website ) Sustainable consumption and production Climate change and energy Protecting natural resources and enhancing the environment Creating sustainable communities and a fairer world Aggregation to produce a single ‘bottom-line’ indicator is explicitly rejected – it is not practicable or meaningful to combine all 126 disparate indicator measures into a single index of sustainable development. Aside from the technical difficulties involved, some indicator measures are more important than others and key messages would be lost (DEFRA 2008b)

43. Sustainable development indicators 2 – ISEW/GPI ISEW – Index of sustainable economic welfare GPI – Genuine progress indicator Daly and Cobb 1989 version ISEW  {(C/D) + (E + F+ G + H)– (I + J + K + L + M + N + O + P + Q + R + S + T + U) + (V + W)}/Pop (19.43) C is personal consumption expenditure D is an index of distributional inequality E is an imputed value for extra-market labour services F is an estimate of the flow of services from consumer durables G is an estimate of the value of streets and highway services H is an estimate of the value of publicly provided health and education services I is expenditure on consumer durables J is an estimate of private defensive spending on health and education K is expenditure on advertising at the national level L is an estimate of commuting cost M is an estimate of the costs of urbanisation N is an estimate of the costs of automobile accidents O is an estimate of water pollution costs P is an estimate of air pollution costs Q is an estimate of noise pollution costs R is an estimate of the costs of wetlands loss S is an estimate of the costs of farmland loss T is an estimate of the cost of non-renewable-resource depletion U is an estimate of the cost of long-term environmental damage V is an estimate of net additions to the stock of reproducible capital W is the change in net overseas indebtedness

44. GDP and GPI compared Despite differences in the adjustments made to personal consumption across ISEW/GPI exercises, results generally similar: For every society there seems to be a period in which economic growth brings about an improvement in the quality of life, but only up to a point – the threshold point – beyond which if there is more economic growth, quality of life may begin to deteriorate. (Max-Neef 1995) Sensitivity analysis (Neumayer 2000) suggests that if here is a threshold, it is not due to movements in the environmental components of the index. Results do appear to be sensitive to assumptions about unpaid labour. GDPpc GPIpc 2004 1950 1974 Figure 19.5 GPI per capita and GDP per capita for the USA 1950-2004 Source: Talberth et al 2007

45. The economy and the environment again: what the economy does Environment The economy extracts materials and energy from the environment, using them along with capital and labour to produce the means to the satisfaction of human needs and wants, and inserts back into the environment an equal mass of waste (Chapter 2) Common (2007a) suggests that a natural measure of economic performance would be E = S/I with E for efficiency S for satisfaction I for (environmental) input Extractions Insertions Economy Satisfactions Figure 19.6 What the economy does

46. Aggregation without prices E = S/I For S use HLY = H x LY where HLY is Happy Lifetime Years H is the average score for self-assessed happiness/satisfaction (Chapter 3) LY average life expectancy at birth For I there is no uniquely correct measure. Use as proxies Energy use – a measure of work done, which is what impacts on the environment Ecological footprint – the area of land and water to provide environmental inputs and absorb wastes Greenhouse gas emissions – the source of the major environmental problem now facing the world

47. Performance converting environmental impact into satisfaction ECE ETE EF EG1 EG2 Country HLY per toe1 Country HLY per toe1 Country HLY per ha Country HLY per ton Carbon2 Country HLY per ton Carbon2 Bangladesh 336.00 Bangladesh 181.44 Bangladesh 56.00 Uruguay 501.00 Jordan 512.86 Senegal 104.33 Morocco 91.20 Vietnam 54.00 Bangladesh 168.00 Albania 113.00 Morocco 95.00 Philippines 64.77 Peru 45.89 Vietnam 144.00 Bangladesh 112.00 Honduras 94.2 Albania 62.85 India 42.63 Albania 84.75 Vietnam 108.00 Philippines 88.60 Peru 62.28 Morocco 42.22 El Salvador 71.86 El Salvador 100.60 Canada 7.41 USA 6.87 Latvia 7.55 Canada 9.23 Australia 8.81 USA 7.14 S Africa 6.77 Ukraine 7.48 Australia 8.69 USA 8.78 Luxembourg 7.00 Russia 6.68 Russia 6.43 Russia 7.65 Ukraine 8.52 Russia 6.74 Ivory Coast 6.04 USA 6.01 Estonia 7.35 Estonia 8.18 Iceland 5.39 Tanzania 3.50 Estonia 5.22 Zimbabwe 7.18 Russia 7.86 Table 19.15 Highest and lowest E scores ECE – commercial energy. ETE – total energy. EF – ecological footprint. EG1 – greenhouse gas emissions including land use changes EG2 – greenhouse gas emissions excluding land use changes 1 toe for tonnes oil equivalent. 2 all ghgs converted to heating equivalent CO2

48. Efficiency based sustainable development indicators 1. Each nation’s ghg emission allowance to be its population size multiplied by an equal per capita share of the set global emissions total. For the ith nation where Country i experienced sustainable development if Ei,t+1>Ei,t and GHGi,t≤GHG*i and GHGi,t+1 ≤GHG*i. If, that is, E increased and emissions stayed within equitable allowance. 2. For F*i as a nation’s share of the world’s available productive land and water(per capita share of global times population size), country i experienced sustainable development if Ei,t+1>Ei,t and Fit ≤F*i and Fi,t+1 ≤F*i If, that is, E increased and footprint stayed within equitable allowance.