ASSIGNING ECONOMIC VALUE TO NATURAL RESOURCES

Commission on Geosciences, Environment, and Resources

Commission on Behavioral and Social Sciences and Education

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1994



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Assigning Economic Value to Natural Resources ASSIGNING ECONOMIC VALUE TO NATURAL RESOURCES Commission on Geosciences, Environment, and Resources Commission on Behavioral and Social Sciences and Education National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1994

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Assigning Economic Value to Natural Resources NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. The overview section of this report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Robert M. White is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Robert M. White are chairman and vice chairman, respectively, of the National Research Council. LIBRARY OF CONGRESS CATALOG CARD NO. 94-69496 INTERNATIONAL STANDARD BOOK NUMBER 0-309-05143-6 Additional copies of this report are available from National Academy Press 2101 Constitution Avenue, NW Box 285 Washington, DC 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area) B-507 Copyright 1994 by the National Academy of Sciences. All rights reserved. Cover art by Terry Parmelee. The artist expresses emotion with movement, symbol, and geometric form to create a poetic and imaginative version of nature. Parmelee is represented by the Jane Haslem Gallery in Washington, D.C. Printed in the United States of America.

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Assigning Economic Value to Natural Resources COMMISSION ON GEOSCIENCES, ENVIRONMENT, AND RESOURCES M. GORDON WOLMAN, Chair, The Johns Hopkins University, Baltimore, Maryland PATRICK R. ATKINS, Aluminum Company of America, Pittsburgh, Pennsylvania EDITH BROWN WEISS, Georgetown University Law Center, Washington, D.C. JAMES P. BRUCE, Canadian Climate Program Board, Ottawa, Ontario WILLIAM L. FISHER, University of Texas, Austin EDWARD A. FRIEMAN, Scripps Institution of Oceanography, La Jolla, California GEORGE M. HORNBERGER, University of Virginia, Charlottesville W. BARCLAY KAMB, California Institute of Technology, Pasadena PERRY L. McCARTY, Stanford University, California S. GEORGE PHILANDER, Princeton University, New Jersey RAYMOND A. PRICE, Queen's University at Kingston, Ontario, Canada THOMAS A. SCHELLING, University of Maryland, College Park ELLEN SILBERGELD, Environmental Defense Fund, Washington, D.C. STEVEN M. STANLEY, The Johns Hopkins University, Baltimore, Maryland VICTORIA J. TSCHINKEL, Landers and Parsons, Tallahassee, Florida Staff STEPHEN RATTIEN, Executive Director STEPHEN D. PARKER, Associate Executive Director MORGAN GOPNIK, Assistant Executive Director JEANETTE SPOON, Administrative Officer SANDI FITZPATRICK, Administrative Associate ROBIN ALLEN, Senior Project Assistant

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Assigning Economic Value to Natural Resources COMMISSION ON BEHAVIORAL AND SOCIAL SCIENCES AND EDUCATION JOHN A. SWETS, Chair, Bolt Beranek & Newman, Inc., Cambridge, Massachusetts ALFRED BLUMSTEIN, Carnegie Mellon University, Pittsburgh, Pennsylvania ANN L. BROWN, University of California, Berkeley KAREN DAVIS, The Commonwealth Fund, New York, New York RICHARD ELMORE, Harvard University, Cambridge, Massachusetts BARUCH FISCHHOFF, Carnegie Mellon University, Pittsburgh, Pennsylvania JAMES GREENO, Stanford University, California ROBERT M. HAUSER, University of Wisconsin, Madison PATRICIA KING, Georgetown University Law Center, Washington, D.C. CHARLES MANSKI, University of Wisconsin, Madison DANIEL McFADDEN, University of California, Berkeley DAVID MECHANIC, Rutgers University, New Brunswick, New Jersey JANE A. MENKEN, University of Pennsylvania, Philadelphia WILLIAM A. MORRILL, MATHTECH, Inc., Princeton, New Jersey W. RICHARD SCOTT, Stanford University, California CHRISTOPHER A. SIMS, Yale University, New Haven, Connecticut RICHARD F. THOMPSON, University of Southern California, Los Angeles WILLIAM J. WILSON, University of Chicago, Illinois DAVID A. WISE, Harvard University and National Bureau of Economic Research, Cambridge, Massachusetts Staff BARBARA BOYLE TORREY, Executive Director EUGENIA GROHMAN, Associate Director for Reports CHRISTINE L. MCSHANE, Editor PAULA J. MELVILLE, Administrative Associate ANN G. POLVINALE, Administrative Officer

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Assigning Economic Value to Natural Resources Preface On July 1-3, 1993, the National Research Council's (NRC's) Commission on Geosciences, Environment, and Resources (CGER) and Commission on Behavioral and Social Sciences and Education (CBASSE) convened a retreat at the J. Erik Jonsson Study Center in Woods Hole, Massachusetts. This workshop on "Valuing Natural Capital in Planning for Sustainable Development" investigated the prospects for, and problems of, incorporating natural resource and environmental assets into economic frameworks, particularly into the national income accounts (such as gross national product or gross domestic product). Within this context, the specific goals of the workshop were to identify crucial technical and conceptual issues, uncover points of consensus and controversy, chart directions for future research and action, and select areas for high priority attention. The workshop assembled individuals with a wide spectrum of views on environmental, scientific, public policy, and economic issues (see Appendix). Attendees included prominent researchers in environmental and natural resource economics, behavioral, social, and decision sciences, and biologic and earth sciences. Commissioned papers and background articles were distributed in advance to the workshop participants. Together with the presentations, these materials were designed to establish a common basic level of understanding. On this basis, the workshop organizers hoped to increase the sensitivity of different disciplines to the concerns and perspectives of those in other fields, foster common understanding, and summarize some of the major issues of environmental accounting for scholars and policymakers unfamiliar with the debate. At the workshop, basic theoretical issues including the implications of the different concepts of "sustainability" were outlined, work in progress that applied economic techniques to valuing natural resources was presented, and procedures for representing environmental and natural resource issues in an economic framework were suggested. There was considerable disagreement about the definitions and implications of many of the concepts discussed, and no consensus emerged as to immediate remedies for the perceived weaknesses in the present system of accounting. One major theme dominates this volume: the rationale for, and the problems faced in expanding conventional measures of economic activity to encompass changes in natural capital—that is, in the stock of renewable and nonrenewable natural resources and in the quality of the environment. Short-hand and somewhat casual references to such conceptual and staffs

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Assigning Economic Value to Natural Resources tical reform ideas have sometimes employed the term "greening the GDP." Without wishing to be pedantic, we have chosen to avoid the "green" characterization. For one thing, the word suggests only the environmental part of our dichotomous concern. (Depletion of, say, copper ore is not viewed as primarily an environmental issue.) Moreover, in a number of countries, "green" frequently describes political institutions or platforms that go beyond both environmental and natural resource problems. In this overview, we therefore adopt the term ''natural resource and environmental accounting'' when discussing the problem of integrating these two elements into the prevailing system of economic measurement. Secretary of the Smithsonian Robert McC. Adams chaired the workshop and was a speaker. Nobelist Robert Solow delivered the keynote address. Other speakers included Peter Bartelmus, Norman Bradburn, Carol Carson, Paul Craig, Pierre Crosson, Eric Fischer, Baruch Fischhoff, Thomas Lovejoy, Mohan Munasinghe, Henry Peskin, Francis Pierce, Raymond Prince, Claudia Sadoff, David Simpson, and Brian Skinner. M. Gordon Wolman delivered the closing remarks. The workshop sessions and panels were chaired by Robert McC. Adams, Edith Brown Weiss, Joel Darmstadter, Helen Ingram, and William Morrill. The planning group that organized the workshop was chaired by Joel Darmstadter. It included Edith Brown Weiss, Pierre Crosson, Ernst Lutz, Mohan Munasinghe, Raymond Prince, Stephen Rattien, Craig Schiffries, Miron Straf, Michael Toman, E-an Zen, and M. Gordon Wolman. This volume includes both an overview of major issues in valuing natural capital and more technical background papers contributed by individual authors. The material presented reflects the wide variety of views and opinions expressed, at times contentiously, by those participating in the event. The overview section draws on the proceedings of the retreat, on the background papers, and on selected scholarly literature listed in the bibliography. It attempts to show the reader the lay of the land without claiming to have discovered a road map for traversing it. The CGER and the CBASSE gratefully acknowledge the generous contributions of time and expertise by the retreat participants. Special thanks are extended to those who made formal presentations and acted as session chairs, to Alice Killian who served as reporter at the workshop and drafted the overview section with oversight from the committee, and to Morgan Gopnik and Angela Brubaker who produced this volume. It is hoped that the material presented here will help to stimulate new ideas, research, and policy formulation, and perhaps encourage further inquiry into such issues by units of the NRC. M. Gordon Wolman, Chair Commission on Geosciences, Environment and Resources Robert McC. Adams, Chair, 1990-1993 Commission on Behavioral and Social Sciences and Education

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Assigning Economic Value to Natural Resources Contents OVERVIEW   1     Introduction   1     Environmental Values and the National Accounts   2     Historical Background   2     National Accounts Dilemmas   3     Environmental Accounting Challenges   5     Issues in Environmental Accounting   6     Sustainability   6     Substitutability   7     Irreversibility   8     Intergenerational Equity   9     Technical Issues   9     Philosophical Questions   12     Issues for Further Study   14     Conclusion   15 ISSUE PAPERS   17 1   An Almost Practical Step Toward Sustainability Robert Solow   19 2   What Can Policymakers Learn from Natural Resource Accounting? Robert Repetto   30 3   The Feasibility of Incorporating Environmental and Natural Resource Availability Into the National Accounts Raymond Prince   47

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Assigning Economic Value to Natural Resources 4   Sustainable Resource Accounting Henry M. Peskin   59 5   Transfer Models for "Green Accounting": An Approach to Environmental Policy Analysis for Sustainable Development Paul P. Craig and Harold Glasser   67 6   Natural Resource and Environmental Accounting in U.S. Agriculture Pierre Crosson   111 7   Natural Resource Accounting for the Forestry Sector: Valuation Techniques and Policy Implications in Thailand Claudia W. Sadoff   132 8   Soil Quality in Relation to Value and Sustainable Management Francis J. Pierce   146 9   Valuing Biodiversity: An Application of "Green Accounting" R. David Simpson and Roger A. Sedjo   165 APPENDIX: Workshop Planners and Participants   179

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Assigning Economic Value to Natural Resources ASSIGNING ECONOMIC VALUE TO NATURAL RESOURCES

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