Bridging Economy and Environment: Use of Environmental Accounting in Local & Regional contexts

Alistair Hunt University of Bath, UK

Inter-Regional GROW Conference: Bologna, 20th June, 2007

EU Policy Context Lisbon (economic and social) Gothenburg (environment)

Climate change  Sustainable transport  Public health Resource management

Green accounting links economic and environmental objectives

Overview of Presentation

Green (environmental) accounting Rationale Elements of Green Accounting:

Theoretical & conceptual basis Empirical progress in different

contexts Conclusions for research and practical

applications.

Rationale for conventional accounting

Measurement of economic activity - production = GDP Often used as indicator of welfare

Two elements of accounts Changes in Stocks of Capital -

Investment Measurement of production/output –

Flows - Consumption

Standard National Accounts (SNA)

framework

NNP = C + I – D + X – M Where:NNP = Net National ProductC = ConsumptionI = InvestmentD = DepreciationX = ExportsM = Imports

Misleadingly used as measure of welfare: welfare not proportionate to consumption of produced goods

Green accounting – rationale

“The effect of mankind’s activity upon the environment has been an important policy issue throughout the last part of the twentieth century….

increasing recognition that continuing economic growth and human welfare are dependent upon the services provided by the environment”

Source: The United Nations Handbook of National Accounting - Integrated Environmental and Economic Accounting

Economic – Environmental linkages have implications for meso- and macro-economic management

Meso/macro-economic management more responsive to environment if environmental indicators exist

Economic activity and environmental impact

Elements of Green Accounting - Outline

• Environmental services • Ecosystem life support systems• Landscape

• Environmental damages• Pollution flows e.g air & water quality

• Defensive (environmental protection) expenditures

• e.g. noise reducing windows & IPPC technologies• Resource depletion

• Non-renewables; renewables

Weak and Strong Sustainability

Different types of capital: Manmade capital - K Human Capital (Intellectual capital) - H Social capital - SC Natural capital - N

Stocks of natural resources including oil, gas forests and fisheries

The earth’s life-support system

Weak and Strong Sustainability

Weak sustainability: The sum of the values of changes in capital stocks must be positive. E.g. the Hartwick rule

Strong sustainability: Each type of capital stock must be maintained in its own right.

0

NSCHK

0,0

,0,0

NSC

HK

Empirical progress in Environmental Accounting in different contexts – some evidence

UN initiative on Green Accounting – UNSEEA (1993, 2000, 2003)

System of integrated Environmental and Economic Accounting (SEEA) – complements SNA method for measuring economic activity

Adds environmental information to existing Input-Output economic data

Physical stock and flow tables Hybrid (physical & monetary) stock and flow tables

Methodological guidance on resource depletion, degradation, defensive expenditures

Physical & monetary stock and flow tables

Often known as NAMEAs (National Accounting Matrix including Environmental Accounts).

Physical flow accounts include four types of flow:

products (produced in the economic sphere and used within it),

natural resources (mineral, energy, biological), ecosystem inputs (air and water) and residuals (solid, effluent, emissions).

Each of these accounts is expressed in terms of supply to, and use by, the economy.

i.e. tables represent the flows between the economy and the environment.

Simple hybrid supply and use table – Use in RAMEA/NAMEA

An indicator of weak sustainability: genuine savings

Genuine Savings = monetary savings less the depreciation on manmade capital less the depletion of natural capital. (From S = Iv identity)

Value of changes in economy’s overall capital stocks. Negative genuine saving corresponds to

unsustainability, since if depleting capital stock, can receive lower welfare from it in future

Genuine Savings rates low or negative for Sub-Saharan Africa and for Middle East and North Africa.

Assumes all capital is substitutable

Genuine savings for Tunisia, as % of GDP

The Index of Sustainable Economic Welfare (ISEW)

ISEW (Daly and Cobb (1989)) current welfare should be measured as the

current flow of services from all sources, rather than current output of marketed goods

E.g. value for leisure time to correct for the fact that

welfare could increase while NNP decreases if people choose to work less;

higher incomes of urban residents are compensation for externalities connected with urbanisation and congestion, proportion of income should not be included as welfare

The Index of Sustainable Economic Welfare (ISEW)

ISEW = Consumption + Investment + Extra-Market services + Consumer

Durables Services + Services of Roads + Public Health & Education – Consumer Durables Expenditure – Private Defensive Expenditure on Health /Education – Advertising – Commuting costs – Pollution costs – cost of loss of ecosystems – resource depletion costs – Long term environmental damage

Applications at national level: UK, Sweden, Netherlands, Italy, Poland, Austria Applications at local level: Siena (Pulselli et. al. 2006) Problem – mixes sustainability and welfare issues in single measure

ICCED developed: to demonstrate how well-being changes

over time if sustainability standards imposed and effects of environmental damage are accounted for.

corrects for environmental damage and expenditure incurred under sustainability policies (similarities with local EcoBudget initiatives e.g. Roma)

Index of Consumption Corrected for Environmental Damage (ICCED)- EC Greensense project

Sustainability targets analysed under the GREENSENSE project

Environmental Impact

Weak Sustainability Intermediate sustainability target Strong sustainability target

Air pollution Invest the value of damage to capital stocks due to air pollution.

Current legislation with Emission Ceilings

Medium Ambition GAP Closure + Emission Ceilings / Maximum Technical Feasible Solution

Climate Change Invest the NPV of the cost of current carbon emissions ($4/tonne current estimate)

550 ppmv by 2120 450 ppmv by 2120

Biodiversity Invest the value of damage to capital stocks due to biodiversity loss

Natura 2000 network to be preserved No further wetland loss or degradation 15% of agricultural area under management contracts No further deterioration of natural and semi-natural forests

20% of all land to be preserved in natural condition

Natural resources Energy: Invest % of resource rents Invest value of future price Increases Forestry: Invest value of future price increases

12% energy from renewables by 2010 16-19% energy from renewables by 2010 (current estimate)

Toxic Substances Invest the value of damage to capital stocks due to Toxic substances

Concentration levels of lead and cadmium given in EU Directives

Future steady-state concentrations of lead and cadmium

Urban Environmental Problems (Noise)

Not applicable since only current welfare impacts

Not applicable since only current welfare impacts

Not applicable since only current welfare impacts

Waste Invest the value of damage (e.g. land converted for landfill) due to waste

Landfill max. 35% of household waste; Recycle 25%

Land space availability

Water Pollution Invest the value of any decline in water resource stocks.

Satisfaction of the EC Water Framework Directive

Satisfaction of the EC Water Framework Directive

Greensense: Environmental impacts on welfare (UK)

Intermediate StrongTotal environmental Impacts Billions of (2000) Euros Sust. Target Sust. Target

1990 1998 2006 2006Air Pollution 24 13 6.6 5.5Biodiversity -0.174 -0.044Resource ExtractionToxic Substances - dioxins 1.8Toxic Substances - heavy metals 0.3 0.06 0.04Noise 2 2.6 2.6Waste (.19) (.18) (.23)Water Pollution 0.5 0.4 0.2 0.2

Total 25 17 9 8

Greensense: ICCED Measures - UK

Per capita (2000) Euros Intermediate StrongUK Target Target

1990 1998 2006 2006GDP 13238 22398 29523 29523Final Consumption Expenditure 10910 18563 25313 25313

Env. Damage 426 294 161 143Env Damage as % Consumption 3.91 1.58 0.64 0.56Env Damage as % GDP 3.22 1.31 0.55 0.48

Avoidance cost 0.2 0.2ICCED 25151 25170

Summary of Empirical initiatives

NAMEA: includes environmental issues within standard accounting framework

Genuine savings – sustainability-related decision rule

ISEW – broader interpretation of welfare

ICCED – includes welfare effects of meeting sustainability targets

Conclusions on Green Accounting Recognition of need to address both current welfare

and sustainability issues from macro-perspective National and international initiatives (e.g. UN SEEA,

2003) are developing improved methodologies Variety of initiatives reflects lack of consensus on

priorities and methods Local applications of methods can reflect regulatory

responsibilities but may be difficult to define sustainability at this scale?

Applications very data-hungry and modelling intensive