5
Transfer Models for "Green Accounting": An Approach to Environmental Policy Analysis for Sustainable Development

Paul P. Craig

Harold Glasser

Civil and Environmental Engineering University of California, Davis

THEME: ARE WE KILLING THE GOLDEN GOOSE?

Efforts to revise national income accounts to incorporate environmental externalities ("green accounting") may help us to better understand how our social, political, and economic actions impact the environment. A primary motivation behind "green accounting" is concern that humankind's activities are creating significant environmental damage which is not captured by conventional accounting techniques. Ascertaining the extent to which humans are consuming nature as contrasted with living upon interest has reached paramount importance. Phrased informally, is our society unknowingly ''killing the golden goose?"

There exists an immense range of views on this question. Optimists argue that technological advances will provide substitutes, and claim that there is no need to worry. Pessimists—"cliffologists"—worry that we are destroying irreplaceable resources and creating adverse side-effects at an accelerating pace; they fear that disaster looms.1

Regardless of perspective, there seems to be agreement that addressing questions of sustainability requires new tools. We argue here that national income accounts, as commonly constituted, are inadequate to capture some of the most important features of the debate over sustainability. We review the most important of these reasons. From this review we conclude that there are severe methodological issues that cannot as yet be resolved. We propose one approach, which we call the "transfer model" methodology. While this technique shows promise, it is still in an early stage of development.

Our transfer model approach, which emphasizes both stocks and flows, is a framework for giving meaning and context to green accounts. It also focuses upon biogeophysical measures

1  

These differences were clear in the intense discussions at the National Research Council workshop "Valuing Natural Capital in Planning for Sustainable Development," for which this paper was prepared.



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Assigning Economic Value to Natural Resources 5 Transfer Models for "Green Accounting": An Approach to Environmental Policy Analysis for Sustainable Development Paul P. Craig Harold Glasser Civil and Environmental Engineering University of California, Davis THEME: ARE WE KILLING THE GOLDEN GOOSE? Efforts to revise national income accounts to incorporate environmental externalities ("green accounting") may help us to better understand how our social, political, and economic actions impact the environment. A primary motivation behind "green accounting" is concern that humankind's activities are creating significant environmental damage which is not captured by conventional accounting techniques. Ascertaining the extent to which humans are consuming nature as contrasted with living upon interest has reached paramount importance. Phrased informally, is our society unknowingly ''killing the golden goose?" There exists an immense range of views on this question. Optimists argue that technological advances will provide substitutes, and claim that there is no need to worry. Pessimists—"cliffologists"—worry that we are destroying irreplaceable resources and creating adverse side-effects at an accelerating pace; they fear that disaster looms.1 Regardless of perspective, there seems to be agreement that addressing questions of sustainability requires new tools. We argue here that national income accounts, as commonly constituted, are inadequate to capture some of the most important features of the debate over sustainability. We review the most important of these reasons. From this review we conclude that there are severe methodological issues that cannot as yet be resolved. We propose one approach, which we call the "transfer model" methodology. While this technique shows promise, it is still in an early stage of development. Our transfer model approach, which emphasizes both stocks and flows, is a framework for giving meaning and context to green accounts. It also focuses upon biogeophysical measures 1   These differences were clear in the intense discussions at the National Research Council workshop "Valuing Natural Capital in Planning for Sustainable Development," for which this paper was prepared.

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Assigning Economic Value to Natural Resources which represent direct indicators of particular aspects of sustainability. Such issues were raised in the major report, World Conservation Strategy (IUCN, 1980, Section 4.1): Sustainable utilization is somewhat analogous to spending the interest while keeping the capital. A society that insists that all utilization of living resources be sustainable ensures that it will benefit from those resources virtually indefinitely. According to this view, sustainability requires that certain baseline conditions be guaranteed. Because of difficulties associated with monetization (among others), baseline conditions are best specified in biogeophysical terms that take into account both stocks and flows. For instance, biological terms appear the most informative when discussing issues such as the need of species for habitat, healthy food, clean water, adequate range, a minimum viable population, stress resistance, etc. If these and other baseline conditions cannot be provided, species are likely to go extinct. Because of ambiguities and uncertainties about what constitutes sustainability and whether or not it is being achieved in particular cases, it is not surprising that discussions of sustainability frequently lead to debate. Questions concerning humankind's relationship to the environment, perception of growth, views on the helpfulness or harmfulness of technology, salience of equity issues (both intragenerational and intergenerational), population stress, species and cultural diversity, and the ability of our present socioeconomic-political systems to effectively address these issues are all relevant to this discussion. These issues help us to explore the preconditions for sustainability. Improved natural capital accounts can help us to explore our current state of affairs and hypothesize about how we got here and what the future might hold. Consensus on the range of diverse issues is not necessary for directing policies in a more sustainable direction. The economist Herman Daly has provided a useful starting point by observing that: [f]or the management of renewable resources there are two obvious principles of sustainable development. First that harvest rates should equal [or be lower than] regeneration rates (sustained yield). Second that waste emission rates should equal [or be lower than] the natural assimilative capacities of the ecosystems into which they are emitted. Regenerative and assimilative capacities must be treated as natural capital, and failure to maintain these capacities must be treated as capital consumption, and therefore not sustainable [our interjection] (1990:2). These two "common sense" principles for the establishment of sustainable policies differ from traditional economic indicators in that they are biogeophysically based. To make such principles operationally useful one must have data on actual stocks and flows. We suggest that when the issue at hand is sustainability, economic valuation techniques are often too decoupled from the biogeophysical world to provide us with the necessary insights. Our approach eliminates the need for developing pseudo-market values for currently nonmarketed goods. The entire issue of assigning monetary values, with its uncertainty, problems of time value, cultural variability, added cost, etc., is effectively side-stepped. Such accounts could serve as biogeochemical satellites to complement the existing monetized national income accounts.

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Assigning Economic Value to Natural Resources Green accounting cannot focus on renewable resources alone. Complex trade-offs and substitutions may be consistent with sustainability. It is important to recognize that Daly's guidelines are preliminary and not absolute. They are used to illustrate the efficacy of considering a biogeophysically based approach to natural capital accounting. Daly's notions do not convey that natural capital may be consumed and transformed into other forms that may in turn be sustainable. This may, in fact, be desirable from a development perspective. Harvesting of nonrenewables may, in certain instances, prove to be more "sustainable" than harvesting some resource sustainably. Imagine the case of using a pristine wild river to generate electricity as contrasted with creating solar cells from sand and petrochemicals. Energy from oil may provide a springboard to sustainable photoelectric electricity, while the damming of the river may irreparably destroy ecosystems and native cultures. Static or snapshot analysis is not enough either. A sustainable system should be operated so as to assure resilience against inevitable fluctuations. Determining safe and sustainable harvest levels requires much more information than inventorying natural capital accounts (stock sizes). Careful empirical modeling exercises and field studies are necessary to assess feedbacks, rates of change of stocks, critical cause and effect relationships, hazards, etc. How to develop these satellite accounts and their associated machinery is far from clear. We believe that the focus on stocks, flows, uncertainties, and their interrelationships that lies at the core of this paper moves in the right direction, but we recognize the difficulty with making direct linkages to existing, monetized national income accounts. The transfer model approach is designed to explicitly incorporate multiple world views and uncertainty. Accounting systems should reflect a recognition that experts differ, and that in any controversial area there are optimists and pessimists. For example, the (current) centrist position on the long-term impact of carbon dioxide on climate and thence on agricultural output is optimistic in the sense that potential problems are believed to be addressable at the cost of a few percent of gross national product (GNP). However, some experts are less sanguine. We argue that a successful accounting system should also reflect the views of those (in this example, a minority) whose analysis suggests severe adverse impacts with high social cost. Discussion at the National Research Council Workshop emphasized the point that all accounting systems necessarily and unavoidably reflect our perception of the world and our perspective on limits. The importance of these "value judgements" (e.g., regarding perspectives of what the future will and should be like; of the roles of technology; of how conceptual frameworks and knowledge bases will change; of how to discount the future; and of equity and the allocation of resources among different groups) becomes amplified when one is dealing with intergenerational issues. For example, the possibility of severe adverse environmental consequences from anthropogenic greenhouse gas emissions has just recently appeared on scientific and political agendas; the implications of these gases for policy has just begun to be seriously discussed. A successful green accounting framework must be designed so as to make assumptions clear, and to allow a broad band of perspectives to be represented. Our approach, by focusing upon conceptual structures, biogeochemical indicators, and judgements about what is likely to be considered important in the future, directly addresses these considerations. We stress that this is a conceptual paper. As yet there has been only limited work on combining bio

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Assigning Economic Value to Natural Resources geophysical satellite accounts with transfer models and on the use of uncertainty analysis techniques in environmental accounting. Our goal is to suggest directions, and to illustrate the promise of this approach with some oversimplified schematic examples. The framework that we propose links physically based green accounts with "transfer models" to provide the meaning, context, and insight necessary to assess the health of the ultimate "golden goose"—the global life support system. STRUCTURE OF THE PAPER The paper is divided into seven textual sections. It also includes eleven figures and references. The core of the paper is the conceptual. Our goal is not to provide answers (a completed green accounting framework), but to correctly frame the appropriate questions, a critical prerequisite for developing successful green accounts. Because there is much controversy over the need for an approach such as ours, we spend much of the paper presenting the background. We open with a discussion of the need for conceptual frameworks. What kinds of goals should green accounts attempt to meet. Who are the audiences and users? We next examine limitations on optimization techniques for the long-term. We then explore the reasons why goal-setting is so important in contemplating long-term environmental issues. Next we review several technical approaches to long-term issues, indicating their primary strengths and shortcomings. We conclude with simplified examples focusing on two specific long-term issues— radioactive waste disposal, and global warming and its possible impact on agriculture. We present illustrative graphs that show how a risk analysis approach generates visual aids that can reflect not only the "centrist" conclusions, but which also allow one to understand what might be expected if alternative, less likely, perspectives turn out to be correct. We urge the reader to examine these figures, and to try to form a view as to whether his/her views on global climate change can be comfortably fitted into the framework. We also ask the reader to consider how this approach might influence their perspective on developing appropriate policy. We suggest that capturing a representative range of perspectives, with their estimated likelihood and conceivable impacts, can help us to become better decisionmakers. WHY CONCEPTUAL FRAMEWORKS MATTER: LIMITS AND EQUITY [S]tories generate theories and . . . theories are transformed in the telling, the resultant combinations serving as self-fulfilling prophecies (Apter, 1993). Environmental accounting, like more traditional national income accounting, cannot exist in a vacuum. Data develops meaning and context by placing it within a conceptual framework that incorporates at least one view of the world. Many issues facing society today qualitatively differ from those of a generation ago. Many types of environmental problems of central importance today were unknown a generation ago. It is no surprise that as new issues emerge,

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Assigning Economic Value to Natural Resources new accounting and evaluation techniques are needed to reflect society's changing insights and concerns. The motivation for ''green accounting" emanates from the growing concern over resource degradation and depletion. To be broadly acceptable, an improved accounting system must be able to cope with the enormous diversity of views on the adaptability of mankind and of the global ecosystem. A wide range of views exist on the feasibility, necessity, and desirability of adaption to a changing environment. The "optimist" view was clearly articulated by a Harvard economist. There is absolutely no reason why, on the grounds of the existence of depletable resources, that we ought to conserve for future generations. . .. It is important to remark on the fact that if they have any luck at all . . . they will be a lot richer than we are. . .. If history is any guide, the costs of the materials and energy that are produced even from depletable resources will be cheaper than they are to us in real terms. . .. There is no reason not to use the marketplace . . . there are no externalities of this type that ought to be brought to bear (Jorgenson, 1981). While such a perspective does not preclude the development of more detailed green accounts, it certainly suggests that technological innovation makes such detailed accounting unnecessary. Investigation into the existence of impending physical limits is precluded by an hypothesis of their nonexistence. Such a view, however, might argue that improved natural capital accounts are necessary to insure that transition to substitutes occurs with minimal adjustment costs. A slightly less optimistic view was expressed in the Brundtland Commission's Report: Humanity has the ability to make development sustainable—to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs. The concept of sustainable development does imply limits—not absolute limits but limitations imposed by the present state of technology and social organization on environmental resources and by the ability of the biosphere to absorb the effects of human activities (The World Commission on Environment and Development, 1987:8). This view posits that sustainability is not a given. It still conveys a strong sense of technological optimism, but it recognizes—albeit grudgingly—the existence of physical limits. While not calling for detailed physical accounts directly, it suggests that more careful accounting will be necessary to insure that we can meet " . . . the needs of the present without compromising the ability of future generations to meet their own needs." A considerably less optimistic view of limits was put forth in the Report of the World Conservation Strategy. A society that insists that all utilization of living resources be sustainable ensures that it will benefit from those resources virtually indefinitely. Unfortunately, most utilization of aquatic animals, of the wild plants and animals of the land, of forests and of grazing lands is not sustainable (UCN-UNEP-WWF, 1980: Section 4.1).

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Assigning Economic Value to Natural Resources This report expresses a clear distinction between the fruits of technological innovation and those of the natural world. Sustainable resource utilization cannot result from technological innovation alone. The report represents a more direct call for improved physical accounts. It suggests that political will, along with much more careful planning and management, are needed to approach sustainability. Herman Daly extends the discussion of environmental limits to emphasize that natural capital and man-made capital cannot be viewed as directly fungible. It must be clear to anyone who can see beyond paper-and-pencil operations on a neoclassical production function, that material transformed and tools of transformation are compliments, not substitutes. Do extra sawmills substitute for diminishing forests? Do more refineries substitute for depleted oil wells? Do larger nets substitute for declining fish populations? On the contrary, the productivity of sawmills, refineries, and fishing nets (man-made capital) will decline with the decline in forests, oil deposits, and fish. Natural capital as a provider of raw material and energy is complimentary to manmade capital. Natural capital as absorber of waste products is also complimentary to the man-made capital which generates those wastes (Daly, 1990:3). Daly's more pessimistic view of the limits of technological innovation can be seen as being in direct contrast to the optimists' view as represented by the Harvard economist, Jorgenson. Daly argues that much more than "luck" is needed to approach sustainability. By focusing upon the complementary nature of natural capital and man-made capital, Daly makes a case for separate, biogeophysically based satellite accounts. A direct attack of the limits of technological innovation, linking concerns over sustainability directly to ethical issues, was put forth by Rajni Kothari: In the absence of an ethical imperative, environmentalism has been reduced to a technological fix, and as with all technological fixes, solutions are seen to lie once more in the hands of manager technocrats. Economic growth, propelled by intensive technology and fueled by an excessive exploitation of nature, was once viewed as a major factor in environmental degradation; it has suddenly been given the central role in solving the environmental crisis (Kothari, 1990:27). Kothari goes on to argue that there are other perspectives of sustainability that are rooted in ethics, not neoclassical economy: Without such striving, sustainability is an empty term, because the current model of development destroys nature's wealth and hence is nonsustainable. And it is ecologically destructive because it is ethically vacuous—not impelled by basic values, and not anchored in concepts of rights and responsibilities. Thinking and acting ecologically is basically a matter of ethics, of respecting other beings, both human and nonhuman (Kothari, 1990:27-28).

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Assigning Economic Value to Natural Resources The ethical concerns of Kothari directly link issues of distribution to sustainability. A definition of sustainable development that explicitly incorporates equity concerns has been put forth by a coalition of about 130 nongovernmental, people's and church organizations actively pursuing sustainable development programs in the Philippines. The "Green Forum" (1991) defines sustainable development as: [a] development course that is not prone to interruption by forces of its own creation which push environmental destruction to intolerable limits, exhaust resources, and exacerbate social inequalities to the point of disruptive political conflict. The philosopher Arne Naess's views on sustainability call for this broader construction of the equity notion to emphasize sustaining human cultural diversity along with ecological diversity. Naess begins with the positive requirement that sustainable development "assures long-range elimination of abject poverty" (1992:307). He also expresses a symmetrical concern over the destructive aspect of excessive wealth engendered by overconsumption. He points to a distinction between "needs" and ''vital needs." The Brundtland Report made no such distinction. Naess's broader construction of equity views extra parking spaces and huge estates as ''needs" which may be left unsatisfied while maintenance of species diversity is more vital. Naess contends that there can be "ecological sustainability if and only if the richness and diversity of life forms are sustained" (1992:307). Our purpose in highlighting this wide variety of views on technological innovation and the preconditions of sustainability is to illustrate how one's conception of the world influences the process of framing issues. Environmental science is a social process that entails discourse and debate along with the acquisition and analysis of data (Norgaard, 1992). In this paper we argue that a successful approach to green accounting must represent the range of views expressed above. We feel that three issues in particular should receive careful consideration: How do we define the "health" of ecosystems? And relatedly, how do we assess sustainable yields, develop appropriate conservation practices, support species diversity, etc.? What is the role of technological innovation and what are the limits of substituting human capital for natural capital? How does one deal with "winners" and "losers?" What happens if project proponents are socio-economically better off than the losers (who may also become culturally impoverished), and a proposed project leads to the widening of this gap? As these questions are applied to different issues, optimists and pessimists are likely to come to very different conclusions as to what factors are relevant. We argue for an approach to analyze these issues that can capture the range of identifiable perspectives, outline "possible" best-and worse-case scenarios, and assess the likelihood of this range of possible scenarios.

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Assigning Economic Value to Natural Resources GREEN ACCOUNTS The idea of redefining national accounting systems is itself not new. In fact, conventional national accounting systems were designed to match a theoretical conception of how the economic subsystem works. National Income Accounts are an example. These derive from a conceptual framework developed by John Maynard Keynes. As Anderson states: "Many of the economic statistics collected by governments in the post-war (World War II) period have been designed essentially to produce figures to put into the equations set out in, or which have been derived from the General Theory." The section on "conceptual frameworks" illustrated how our values and perception of the world influence how we frame issues related to limits and equity. Accounting procedures naturally fare similarly. One expert in international monetary accounting put the matter this way: From different ways of accounting follow different ways of information distribution which, in turn, has a strong influence on the distribution of value-added between interested parties. Financial accounting thus becomes a tool in the distribution of income between social groups (Colbe, 1981:179). As new issues emerge, it is not surprising that older structures must be revised or possibly replaced. Green accounting is properly viewed as a reexamination of the ways in which we think about our relationship to and social responsibility towards the environment and future generations. If we believe that we live in a world with fundamental limits then we need tools that allow us to examine and better understand these limits so that we may learn to live within them. Greenhouse warming and localized air pollution are illustrative. Absent theoretical constructs (the absorption of solar radiation by atmospheric carbon dioxide), atmospheric carbon dioxide concentrations would be of only minor scientific interest. Over three decades ago when Roger Revelle suggested to Charles D. Keeling that he undertake sustained precision measurements on atmospheric CO2, almost no one believed these measurements would be of more than minor academic interest. Today they may be among the most important measurements ever taken by earth scientists! Conceptual focus depends on perspective as well as knowledge of feedbacks and limits. Smog and visibility reduction are major drivers of regional atmospheric analysis, which emphasize atmospheric particulates, hydrocarbons, nitrous oxides, ozone, and sulfates. Technical analyses of local air pollution show that carbon dioxide and methane play essentially no role. This conclusion is explicit in certain regulatory language, which defines hydrocarbons to exclude methane.2 Such exclusion may be justified when the scale of focus is limited to smog and visibility within an airshed rather than the globe. 2   Until recently this was the case with the regulations of the San Francisco Bay Area Air Quality Management District

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Assigning Economic Value to Natural Resources When scientists began to investigate the possibility of adverse effects from global warming, methane assumed significance due to the ability of the methane molecule to efficiently absorb infrared radiation. Thus we have one area of atmospheric investigation (localized air pollution) where CO2 and methane play no major role and another (greenhouse warming) where they are of major importance. Similarly, stratospheric ozone is beneficial as a limiter of ultraviolet radiation, and deleterious when in urban airsheds. Until recently global warming was on few agendas. There was no reason whatsoever to investigate incorporating its implications in national accounts. Today, scientific and technical change has altered that situation irrevocably. Embarking upon the path of developing green accounts requires a concern over the adequacy of existing accounts to represent situations in which both stock and flow variables are important. Emphasis on flow variables tends to favor products that wear out versus those that last a long time. "Representative" stock variables must first be identified and then accurately measured. Both stock variables (resources and savings) and the effects of consumption upon these stocks (productive capacity, regenerative capacity, and waste assimilative capacity) should be considered. Accurate methods are needed for measuring savings, consumption, degradation and reinvestment (restoration, defensive measures, and general improvement/preservation). Green accounting efforts seek to measure, in an instrumental and anthropocentrically focused fashion, the "value" and status of the goods and services provided by the environment. They extend the range of consideration to include marketed raw materials (natural capital in the traditional interpretation), unmarketed goods, and waste assimilative services. Their purpose is to support modeling efforts and empirical investigations that may help us determine if we are living on interest or capital. If we are living upon capital, these research efforts may help us to make the transition to a more sustainable path. An acceptable approach to green accounting should incorporate the perspectives of those who believe that "development" means much more than "economic development." It should, within the limits of feasibility, attempt to represent the full set of goods and services that we obtain from the global ecosystem. It should be designed so as to include factors valued by those advocating a multiplicity of notions of sustainability and a variety of conceptions of the notion of externalities. It must reflect the concerns of those who view themselves as being or becoming worse off along with those who see themselves as advantaged. THE CASE FOR BIOGEOPHYSICAL GREEN ACCOUNTS Two main issues arise when considering the development of green accounts. The first consists of data structure and organization: what entities should be measured and in what format (e.g., qualitative or quantitative units, etc.) should the data be represented? The second issue, which is intimately related to the first, concerns how the descriptive content of the data is to be employed and given context. We suggest that the data should be available in a format which makes it accessible to a wide range of analytical and modeling approaches for thinking about the future. We refer to these approaches, which give meaning, context, and insight to the data, as "transfer models." They represent "meta-models" which allow us to explore particular environmental science (economic, climatological, agricultural, air pollution, soil conservation,

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Assigning Economic Value to Natural Resources etc.) questions under different conditions and scenarios. Transfer models, by informing us about the effects of particular actions (or inactions), can help us to suggest prescriptive response strategies. In this section we briefly review intergenerationally relevant aspects of several common accounting approaches. We start with existing national income accounts, which provide much of the data used by other techniques. We then look at several econometric approaches designed to internalize environmental externalities. Finally, we explore the intergenerational discount rate controversy, examine multicriteria techniques, and review biogeophysical approaches. This overview is intended to indicate the types of approaches that have been proposed for collecting and utilizing green accounts and to highlight some of their benefits and drawbacks. We conclude that monetized natural capital accounts, while necessarily derivative of disaggregated biogeophysical data, are limited in their ability to reflect physical changes in the environment. The additional step of monetization reduces data certainty, inhibits application with alternative transfer models, constrains policy insights, and results in significant added cost. Some Difficulties with Existing Systems of National Accounts Existing systems of national accounts (SNAs) (e.g., GNP and gross domestic product (GDP) measures) exhibit difficulties when applied to intergenerational environmental planning.3 Four "failures" appear particularly troublesome to us: Failure to separate "goods" and "bads." Medical care resulting from air pollution adds to GNP as do restoration efforts, pollution control equipment, and attempts to preserve species. Similarly, highly efficient or conserving practices with many positive externalities, but a very long payback period, fail to receive adequate consideration. One can imagine a society with an ever-increasing standard of living and an ever-diminishing quality of fife. Failure to take account of opportunities foregone, such as the prospective value of species, or wilderness to future generations. The term "option value" was coined by economists to represent this form of valuation, but naming a concept is no substitute for finding a successful approach for including it in an analytical framework. This difficulty becomes particularly important when we consider that a market basket of goods today includes many goods that were previously nonmarketed or nonexistent one hundred years ago. Failure to account for goods and services provided outside the marketplace. Current examples include housekeeper services provided by a homemaker, barter, fuel-wood collection, and hunting and gathering. Nonmonetized farm work a century ago was a huge contributor to national well-being. As the structure of society has changed and the number of small farms has dropped, this factor has decreased. On generational time frames even greater shifts could occur. Failure to account for the value of time spent on voluntary and leisure activities. Methodologies such as "contingent valuation" attempt to deal with some of these problems, but the methodology appears extremely sensitive to the degree to which a problem is currently 3   A list of 16 problems is compiled by Anderson (1991:21-32).

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Assigning Economic Value to Natural Resources popularized. Such techniques also have difficulty with aggregation when a range of alternative projects exist.4 Some of these difficulties can undoubtedly be dealt with by incremental improvements to existing accounting procedures. Other problems, such as inherent theoretical inconsistencies and bounded knowledge-synthesis limitations of the economic paradigm (Norgaard, 1990), appear more fundamental. For instance, while global warming may be troublesome to coastal dwellers in temperate regions, it may be seen as a boon to those in northern Siberia.5 Techniques that aggregate net welfare emphasize the notion of "compensating projects," which may not be appropriate in many situations involving environmental effects. In our view, the sum of the shortcomings makes us dubious of the efficacy of continuing to focus upon monetized accounts for addressing environmental problems, especially those that exist on intergenerational time scales. This is not to say that traditional economic analysis has no role. That role comes after policy goals have been established and after a range of acceptable paths, projects or policies have been identified. Traditional economic analysis is most useful for assessing which of a group of desirable choices or transition paths are most cost-effective. In the next two sub-sections we discuss two specific difficulties associated with monetized green accounts that directly or indirectly address the four "failures" discussed above. Intergenerational Discount Rates Virtually all economic analysis makes use of the concept of the time value of money. From our perspective as scientists, we are dubious about the efficacy of evaluation tools that rely on the concept of the time value of money for assessing problems on multigenerational and highly ambiguous time frames. The work of Mishan (1975:208-209) is aptly quoted by Cline (1992:239): Whenever intergenerational comparisons are involved . . . it is as well to recognize that there is no satisfactory way of determining social worth at different points of time. In such cases, a zero rate of time preference, though arbitrary, is probably more acceptable than the use today of existing individual's rate of time preference or of a rate of interest that would arise in a market solely for consumption loans. 4   It is common in contingent valuation studies to conclude that people would pay large amounts for preservation of a particular amenity such as a lake or a flyway, but to also find that when one contemplates the result of an array of such studies taken together, the total implied expenditures become enormous. This is just one of many consistency problems that we suspect are intrinsic to the methodology. 5   Even in Siberia, warming may be a mixed blessing if it is associated with decreases in precipitation or other adverse weather consequences.

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Assigning Economic Value to Natural Resources FIGURE 5-10 Probability distribution of agricultural output in 2085 using the bimodal temperature distribution. The uncertainty in the impact of temperature on agriculture is so large that the differing views of experts on temperature washed out.

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Assigning Economic Value to Natural Resources These considerations lead to several general observations: The structure of existing accounting systems contains biases. Among the most important of these are biases in favor of quantities that enter into commerce, in favor of flow quantities, and against stocks. Innovation has created ''resources" where none previously existed, but has also lead to new types of side effects. Improved procedures are needed for anticipating side effects, especially those which may be uncertain in character and delayed in time. The concept of limits is not made explicit in most prevailing accounting systems. Limits may be reached so rapidly that there is inadequate time to develop alternatives. In addition, the mere fact of approaching limits may result in bifurcations and irreversibilities (e.g., indirect species extinction resulting from loss of critical habitat). These broad principles lead to a general recommendation which is in the spirit of Ann Harrison's final recommendation presented at a UNEP-World Bank Symposium (Harrison, 1989): Accounting systems should be structured so that they "show for all capital—man-made, natural and human—the ratio of stock at the end of the period to that at the beginning." This broad guideline is open and flexible, but implementing it is difficult. We make several observations directed towards facilitating implementation: Many kinds of measurement units should be included in a green accounting system. When long-range and multicriteria problems are involved, biogeophysical and equity indicators must figure prominently. Econometric techniques become most important after goals have been set and near-term policy decisions are required. Green accounting systems should be fashioned so that very different types of indicators, with different spatial and temporal scales, can be constructed. Some of these will be highly aggregated; others will focus on highly specialized questions (e.g., the number and health of particular species in a given region). Uncertainty is intrinsic and must be made explicit. Approaches for analyzing green accounts must admit minority views, thereby recognizing that, not infrequently, today's minority position is tomorrow's reigning paradigm. Green accounting systems should be dynamic and flexible. They should be structured so that their internal organization can be updated as new indicators and information become available. Green accounting systems must be linked to specific conceptual models of economy-environment interaction. Massive amounts of data cannot be comprehended except in the context of logical structures. Databases need to be constructed so that they are accessible to a wide range of transfer models. An example is the connection between anthropogenic carbon emission and climate. Lacking a conceptual framework (in this case, climate models), data in this area would be incomprehensible.

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Assigning Economic Value to Natural Resources When considering the results of transfer model analyses, the role of "best" answers or "optimized solutions" should be scrutinized carefully. Fine-tuning of existing national income accounts—valuable as such exercises may be—will necessarily be inadequate to the goal of robust assessment of economy-environment interaction. The problems are far too complex. For now, what is needed is a variety of different approaches for developing green accounts. These must be subjected to debate and tested by asking a variety of users whether transfer models which they consider important can easily make use of this data. A minimum precondition for assessing a viable approach to green accounting is that users are able to frame and analyze their most significant questions. This review process should focus on identifying those major conceptual models that are today found useful for characterizing the environment. Because of the extreme complexity of this problem and the changing nature of theoretical understanding, this must be viewed as a dynamic and ongoing process rather than a one-time activity. The second step in developing a green accounting system should focus on articulating and integrating the conceptual frameworks in each topical area where threats to sustainability are believed to exist (e.g., agriculture, forestry, fisheries, climate, species diversity, air, water, and land quality, etc.). This process would be initiated by asking individuals and researchers knowledgeable in particular subfields to identify the normative assumptions and key conceptual frameworks of their field. The process should include practitioners as well as researchers. In the field of agriculture, for example, there should be involvement from family farmers, organic farmers (both large-and small-scale), corporate farmers, genetic engineers, and consumers. Those with long practice in sustainable agriculture (e.g., Amish farmers), should also be involved. Each person might be asked to describe how he/she assesses soil quality and soil deterioration. Each would be asked to consider near-term and long-term threats to sustainability. This type of process would be replicated for each topical area. This process should place emphasis on developing a broad spectrum of indicators. An enormous variety of these have been developed (Bernard, 1990; House, 1990; Huffman, 1990; Kuik, 1991; and Rapport). Maps of ozone holes dramatize change. Many indicators of environmental quality have been proposed, for example, in the 1970s by the Council on Environmental Quality (1981), and more recently by the World Resources Institute (1992) (see also OECD, 1991; Brown et al., 1993). The final stage would be to develop transfer models to relate key concepts and data, and to include ambiguity and uncertainty. This army of databases and indicators should be constructed so as to be useful for addressing issues on a wide variety of spatial and temporal scales, ranging from local to global. Long-term indicators will be predominantly biogeophysical. Nearer-term indicators may be more heavily weighted toward economics. With an extended set of indicators, decisionmaking processes can be more soundly based (incorporating both scientific knowledge and "traditional knowledge," see Agarwal, 1989) and planning can include a broad spectrum of attitudes toward goals, aspirations, risk, progress, and limits. Accomplishing the goals outlined above will require much research. We are a long way from having any satisfactory green accounting system. We have tried to characterize the primary problems associated with extending existing national income accounts to incorporate sustainability considerations. We have also sketched an alternative approach to green accounting

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Assigning Economic Value to Natural Resources that outlines critical prerequisites for developing such accounts. We emphasize the importance of considering a wide range of possible images of the future, then developing representative biogeophysical and equity indicators, and finally using these indicators with transfer models (e.g., economics, multicriteria techniques, risk analysis, etc.) to assess policies and perform resource allocation. APPENDIX: CATASTROPHE: FAILURE IN THE AGRICULTURAL SECTOR COULD IMPACT THE ENTIRE ECONOMY Even though agriculture is a small part of the economy, serious losses there could propagate throughout the society and prove catastrophic. We illustrate this with a very simple model. Agricultural output (on-farm production) is the product of a technical factor (agricultural output per capita) times the number of agricultural workers, which is a fraction of the working population; nonagricultural sector output is the product of another technical factor times the number of nonfarm workers; agricultural output per capita is assumed to decrease as a result of greenhouse warming. In order to maintain total agricultural output, increasing numbers of persons must be shifted to the agricultural sector. This leads to decline in nonagricultural output. For illustrative purposes, we consider the agricultural output per capita to decline logistically as a function of warming. The logistic function provides a slow initial decline, then a rapid decline as temperature approaches a critical value (which we take as 3°C warming), and finally decline slows as experience is gained. The kind of result that emerges from such a structure are shown in Figure 5-11. Such a model illustrates the idea that major loss in agricultural productivity could have severe repercussions throughout the entire society. This is an example of instability. There are many others. Population growth is one of the most discussed (e.g., Ehrlich and Ehrlich, 1990). Instability due to resource depletion is the focus of the "Limits to Growth" school, which lead to considerable debate in the early 1970s, and has recently been reintroduced (Meadows, 1992). Impact of loss of agricultural productivity on consumer output. Agricultural Productivity = AgProductivity PerCapita*(f*N) N = working population f = fraction of working population involved in agriculture = 0.03 at (T1-T) = 0 T = average global temperature T1 = temperature at which major change occurs = 3C T-T1 = temperature increase from reference point, C NonAgOutput = Consumer Output PerCapita*(1-f)*N AgOutputper Capita = L(T) = logistic = 1/[1+exp(a*(T-T1))] a = 1 provides a reasonable response band. Solve equations for NonAgOutput as a function of temperature shift (T-T1). The same kind of result is illustrated in economic language by Howarth and Monahan (1992).

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Assigning Economic Value to Natural Resources FIGURE 5-11 Illustration of nonlinear feedback. Schematic of decline in nonagricultural sector output decline driven by climate-change-induced loss of agricultural sector output.

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