Concepts and Methods
Among the above-mentioned indicator frameworks and index calculations, two sys- temic approaches appear to have become widely accepted standards for assessing the environmental sustainability of growth and development. They are the physical material flow accounts (MFA), developed for particular commodities by the US Bureau of
Mines over a period of decades (USBM 1970, 1975, 1985) and generalized to the national level by the Wuppertal Institute for Climate, Environment and Energy (Bringezu 1997a, 1997b; Schmidt-Bleek et al.1998; Spangenberg et al. 1999) and the physical and monetary System of Integrated Environmental and Economic Accounting (SEEA) of the United Nations (1993a). For a summary description, see Bartelmus (1999). The SEEA is designed as a ‘satellite’ system of the worldwide adopted System of National Accounts (SNA) (United Nationset al. 1993) with which it maintains great- est possible compatibility. Such compatibility with a standard accounting system has not yet been achieved for the MFA. It is addressed in the revision of the SEEA by the so-called ‘London Group’ of national accountants through link-up with physical accounting approaches. For the present status of the revision process, see the home page of the London Group, http:www.statcan.ca/citygrp/london/publicrev/intro.htm
Figure 14.1 illustrates in a simplified manner the approach to material flow accounting.
Material throughput through the economy is shown as inputs of material flows from abroad and the domestic environment, and outputs of residuals discharged into the envi- ronment and of materials exported to the rest of the world. This balance of inputs into, accumulation of materials in, and outputs from the economy includes also so-called
‘translocations’ or ‘ecological rucksacks’ which are indirect flows that do not become part of a product but which are concomitant to its production (Spangenberg et al. 1999, pp. 15–16). The MFA assess the use and movement of materials by means of one key indi- cator, the total material requirement (TMR) and several derived indicators, notably the material intensity (MI) of the economy, measured as TMR per capita and per year, material intensity per unit of service (MIPS) and the material productivity of the economy, GDP/TMR. The MIPS analysis was developed by Schmidt-Bleek (1992a, 1994a). An overview is given by Liedtke et al. (1998).
The SEEA, on the other hand, attempts to incorporate the key functions of natural capital, that is resource supply, waste absorption and use of space, into the asset and pro- duction accounts of the national accounts. Figure 14.2 shows how the SEEA is derived from the standard national accounts as an expansion of conventional stock (asset) and flow (supply and use) accounts. Environmental components are added by incorporating environmental assets and asset changes in the shaded vertical column of the asset accounts. At the same time, natural resource depletion and environmental quality degra- dation represent additional environmental costs in the use accounts, as indicated in the shaded row of natural asset use. Environmental costs reflect the consumption of natural capital and are therefore recorded in both the asset and flow accounts. In this manner important accounting identities, and hence the system character of the accounts, are maintained. Finally, expenditures for environmental protection are shown as ‘thereof’ ele- ments of conventional aggregates (see Figure 14.2; they represent a social response to environmental impacts.
The inclusion of natural assets and asset changes in national accounts generates envi- ronmentally modified monetary indicators. Summing up the rows and columns of Figure 14.2 yields most of these indicators. They include, in particular:
1. environmentally adjusted value added (EVA), generated by industries and calculated by deducting environmental (depletion and degradation) cost incurred by industries from their (net) value added;
2. environmentally adjusted net capital formation (ECF), obtained by deducting envi- ronmental cost from conventional (net) capital formation; and
3. environmentally adjusted net domestic product (EDP), obtained by deducting envi- ronmental cost from net domestic product (NDP) or calculated as the sum of final consumption, ECF and the balance of exports and imports.
Note that these indicators comply with the accounting identities of the conventional national accounts. EDP can thus be calculated as the sum of final demand categories
minerals, ores, energy carriers water air
harvested biomass, hunting, fishing
Techno- sphere Anthropo-
sphere Economy
waste deposit waste-water emissions to air fertilizer, pesticides, dissipative losses
OUTPUT INPUT
Bio-Geo-sphere Environment
Nature
TRANS- LOCATIONS
overburden, excavation of earth, irrigation, drainage water
Input (incl. translocations)
= Total material requirement (TMR per year) Material intensity of the economy
(TMR per year and capita) Material productivity
(GDP per TMR
Material Intensity per service unit (MIPS)
Source: Wuppertal Institute (after Bringezu 1993) UM-194e-2/93.
Figure 14.1 Material flow accounting (MFA)
(capital formation,final consumption and net export) or of value added generated by industries. These and other identities provide a valuable check on the consistency of con- cepts and definitions, and the validity of the data collected. Such checks are, of course, missing in physical indicator frameworks such as those of the OECD (1994a) or the United Nations (1996a), as well as for index calculations outside the national accounts.
For example, the Human Development Index is an average of one monetary indicator (GDP per capita) and two non-monetary indicators of life expectancy and literacy (UNDP 1999). The selection of indicators and inherent equal weighting of unequal issues impairs the validity of such indices, including the above-mentioned genuine progress and environmental sustainability indicators.
The Valuation Controversy: Pricing or Weighing?
Putting a monetary value on natural assets and their changes, even if they are not traded in markets, is a prerequisite for establishing the above-mentioned accounting identities and calculating their component indicators. However, the imputation of monetary values for environmental phenomena, which were not necessarily observed in markets, has been criticized, not only by environmentalists, but also by more conservative national accoun- tants. The following paragraphs review briefly, therefore, the three commonly proposed valuation techniques as to their capability of assessing environmental impacts and reper- cussions.
Domestic production thereof: for environmental
protection Economic cost
(intermediate consumption, consumption of
fixed capital)
Final consumption
Gross capital formulation, consumption of
fixed capital thereof: for environmental protection
Environmental cost of industries
Environmental cost
of households Natural capital consumption
Imports of products thereof: for environmental
protection
thereof: for environmental
protection Exports of products
Other changes of economic
assets
Other changes of environmental
assets
Economic assets
Environmental assets OTHER CHANGES OF ASSETS
CLOSING STOCK
+
=
Industries Households/Government + Rest of World
Economic assets
Environmental assets Assets OPENING STOCKS
SUPPLY OF PRODUCTS
USE OF PRODUCTS
USE OF NATURAL ASSETS
Source: Bartelmus (1999, Figure 2).
Figure 14.2 SEEA: flow and stock accounts with environmental assets
Market valuation
As the name suggests, market valuation uses prices for natural assets which are observed in the market. It is usually applied to ‘economic’ assets1of natural resources, though trading of pollution permits could also generate a market value for ‘environmental’ assets of waste absorption capacities. Where market prices for natural resource stocks, such as fish in the ocean or timber in tropical forests, are not available, the economic value of these assets can be derived from the (discounted) sum of net returns, obtained from their poten- tial use in production. This is the value at which a natural asset. such as a mineral deposit or a timber tract, would be traded if a competitive free market existed for the asset.
Market valuation techniques are also applied to changesin asset values, caused in partic- ular by depletion, that is non-sustainable asset use. These value changes represent losses in the income-generating capacity of an economic asset. Depletion cost allowances thus reflect a weak sustainabilityconcept, calling for the reinvestment of imputed environmen- tal costs in any income-generating activity of capital formation or financial investment.
Maintenance valuation
Maintenance valuation permits the costing of losses of environmental functions that are typically not traded in markets. Dealing only with marketed natural resources would dras- tically limit the scope of economic analysis concerned with scarce goods and services, whether traded or not. In industrialized countries, especially, environmental externalities of pollution can be of far greater importance than natural resource depletion. The SEEA defines maintenance costs as those that ‘would have been incurred if the environment had been used in such a way as not to have affected its future use’ (United Nations 1993a, para.
50).
Maintenance costs are the ‘missed opportunity’ costs of avoiding the environmental impacts caused during the accounting period. They refer to ‘best available’ technologies or production processes with which to avoid, mitigate or reduce environmental impacts.
Of course, these costs are hypothetical since environmental impacts did occur. They are used, however, to determine weights for actual environmental impacts generated during the accounting period by different economic agents. Those agents did not internalize these costs into their budgets but should have done sofrom the societal point of view. As with depreciation allowances for the wear and tear of produced capital, such costing can be seen as a way of identifying the funds required for reinvesting in capital maintenance.
Actual internalization would of course change consumption and production patterns.
The ultimate effects of internalization could be modeled in order to determine hypothet- ical aggregates such as ‘analytical green GDP’ (Vu and van Tongeren 1995) or an ‘optimal net domestic product with regard to environmental targets’ (Meyer and Ewerhart 1998a).
Damage valuations
Damage valuations and related, notably contingent valuations were also proposed in the SEEA for environmental accounting. They were applied in cost–benefit analyses of par- ticular projects and programs but are hardly applicable in practice at the national level.
They refer to ultimate welfare effects (that is, damages) of environmental impacts that are inconsistent with the pricing and costing of the national accounts and quite impossible to trace back to causal agents. Contingent valuations which express a willingness to pay for damage avoidance are inconsistent with market prices because of their inclusion of con-
sumer surplus. They also face well-known problems of free-rider attitudes and consumer ignorance. Mixing these ‘cost-borne’ valuations with ‘cost-caused’ (maintenance cost) valuations creates aggregates which are neither performance nor welfare measures and therefore difficult to interpret.
Conservative national accountants and economists, especially those in industrialized countries, have been quite recalcitrant in implementing environmental satellite accounts in monetary terms. While some now favor the incorporation of the cost of natural resource depletion into the conventional accounts (Hill and Harrison 1995), many con- sider the costing of environmental externalities a matter of ‘modeling’ which, with few exceptions, is deemed to be offlimits for ‘official’ statisticians (van Dieren 1995; Vanoli 1998). The reason is that national statistical offices believe they might lose some of their long-standing ‘goodwill’ from clients (such as finance ministries) if they introduced con- troversial concepts and valuations, even through supplementary satellite systems.
As a result, a number of relatively timid approaches of mixed (physical and monetary) accounting have now been adopted, mostly in Europe. The prototype is the Dutch National Accounting Matrix including Environmental Accounts (NAMEA) (Keuning and de Haan 1998). It refrains from monetary valuation of environmental impacts by simply allocating physical measures of environmental impacts (mainly emissions) to responsible economic sectors. This approach facilitates the linkage of physical impacts with their immediate causes. It fails, however, in aggregating these impacts and relating them as capital consumption and accumulation to the balance sheets of natural assets. To improve on this situation, that is to enhance the policy relevance of the physical data, the NAMEA authors combine different environmental impacts by means of ‘environmental policy theme equivalents’. However, these aggregates suffer from limitations in selecting and defining the themes, and their equivalent factors which still do not permit inter-theme comparison.
The above-described MFA attempt to resolve the aggregation problem for physical measures by assessing material flows with their ‘natural’ (mass) unit of measurement:
weight. Such weighting by weight has been criticized as ‘ton ideology’ since counting tons reduces all kinds of environmental hazards caused by one factor, material input, to a simple one-dimensional measure of this factor. It can be argued that difficult-to-predict potential environmental impacts are best addressed by an indicator like TMR, which focuses on the origin of these impacts, extraction and use of materials, in a highly visible fashion.
For a comprehensive critique of MFA, see Gawel (1998) and, for a counter-critique, Hinterberger, Luks and Stewen (1999). It must be acknowledged that mass is not the only way of measuring materials flows. Weight does not reflect the amount of energy flows, even if energy carriers are included in material flow categories. An alternative, with strong theoretical support, is the thermodynamic concept of exergy,first proposed as a measure of resource flows by Wall (1977, 1987, 1990) and extended by Ayres et al. (1998).
Physical and Monetary Aspects of Sustainability: Dematerialization and Capital Maintenance
Consistent with their focus on physical and monetary data, MFA and SEEA also reflect different notions of the sustainability paradigm, which may be more difficult to reconcile.
They can be categorized as the needs for dematerializationof economic activity and for thepreservation of natural and produced (fixed) capital assets, used in production.
Both the TMR and MIPS indicators of material flow accounting (MFA) reflect the total use of materials as an index of throughput through the economy, including their hidden ‘ecological rucksacks’. For achieving sustainability of economic performance such throughput should be at a level compatible with the long-term ‘ecological equilib- rium’ of the planet. Ecological equilibrium can be operationalized by applying the nor- mative notion of equal ‘environmental space’, that is, access to environmental services by everybody, to the overall dematerialization effort. One result is a sustainability standard calling for halving global TMR while doubling global wealth and welfare: the popular notion ofFactor 4 (Weizsäcker et al., 1997). Under current production and consumption patterns, this can be translated into a Factor 10for industrialized countries. The assump- tion is that an equal environmental space should be reached by all countries in about 50 years while permitting a limited increase of material use in developing countries (Schmidt-Bleek 1994a, p. 168). It is recognized that such norms, which are based on reduc- ing the total weight of materials used, are ‘unspecific’ in their attempt at reducing overall environmental pressure. On the other hand, all kinds of actual and potential environmen- tal impacts and welfare effects are captured, at least roughly. In this manner, a precaution- ary approach is applied which permits anticipating potentially disastrous and largely unknown environmental effects (Hinterberger, Luks and Stewen 1996).
By contrast, economic accounting does not deal with uncertainty. It is a statistical infor- mation system which measures economic performance during a past accounting period.
With regard to physical depletion and degradation of natural assets, the SEEA measures only actually occurred and specific impacts of natural resource losses and pollution, gen- erated by different economic activities. The setting of normative standards is thus avoided in principle, since the deduction of the value of natural capital consumption can be seen as compiling only a ‘net’ value of production, without double counting of (depreciation) costs. Even though capital loss was not avoided de facto, the generation of (hypothetical) funds by means of a depreciation allowance would permit reinvestment of these funds for new capital formation. Such accounting for capital maintenance extends the sustainabil- ity criterion – allowing for capital consumption – already built into the conventional indi- cators of national income, product and capital formation, to natural capital. As shown above, modified aggregates of EDP, EVA, ECF, environmental cost and wealth (in eco- nomic and environmental assets) are the result of such accounting.