4
Accounting for Renewable and Environmental Resources

The previous chapter reviewed issues involved in extending the national accounts to include subsoil assets. This chapter focuses on two other aspects of environmental accounting: renewable and environmental resources. BEA has proposed covering these two categories of resources in future work on integrated accounting. As discussed in Chapter 1, Phase II of that work would focus on different classes of land (e.g., agriculture, forest, and recreation land), on timber, on fisheries, and on agricultural assets such as grain stocks and livestock. Phase III would address environmental resources, including, for example, air, uncultivated biological resources, and water.

The general principles set forth in Chapter 2 indicate that increasingly severe obstacles are likely to arise as the national accounts move further from the boundaries of the market economy. The discussion in this chapter confirms the premise that BEA's Phase III raises the most difficult conceptual, methodological, and data problems. This finding presents a dilemma that must be faced in expanding the accounts: Should follow-on efforts focus on those resources that can be most easily included given existing data and methods, or should BEA focus on including those resources that would have the largest impact on our understanding of the interaction between the U.S. economy and the environment? The panel's investigation, while based on data that are highly imprecise and in some cases speculative, suggests that the development of the accounts proposed for Phase III would be likely to encompass the most significant



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4 Accounting for Renewable and Environmental Resources The previous chapter reviewed issues involved in extending the national accounts to include subsoil assets. This chapter focuses on two other aspects of environmental accounting: renewable and environmental resources. BEA has proposed covering these two categories of resources in future work on integrated accounting. As discussed in Chapter 1, Phase II of that work would focus on different classes of land (e.g., agriculture, forest, and recreation land), on timber, on fisheries, and on agricultural assets such as grain stocks and livestock. Phase III would address environmental resources, including, for example, air, uncultivated biological resources, and water. The general principles set forth in Chapter 2 indicate that increasingly severe obstacles are likely to arise as the national accounts move further from the boundaries of the market economy. The discussion in this chapter confirms the premise that BEA's Phase III raises the most difficult conceptual, methodological, and data problems. This finding presents a dilemma that must be faced in expanding the accounts: Should follow-on efforts focus on those resources that can be most easily included given existing data and methods, or should BEA focus on including those resources that would have the largest impact on our understanding of the interaction between the U.S. economy and the environment? The panel's investigation, while based on data that are highly imprecise and in some cases speculative, suggests that the development of the accounts proposed for Phase III would be likely to encompass the most significant

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economy-environment interactions. This observation is tempered by the realization that to date nothing approaching adequate comprehensive environmental accounting for a country of the complexity of the United States has yet been undertaken. For BEA or the federal government to prepare a full set of environmental accounts would require a substantial commitment. This chapter provides a review of the issues involved in accounting for renewable and environmental resources. It is not intended to be a comprehensive review of work in this area. Rather, it delineates the issues that are involved in environmental accounting and presents two important specific examples that illustrate these issues. The first section reviews BEA's efforts in environmental accounting to date. Next, we analyze how stocks and flows of residuals from human activities relate to natural sources of residuals, natural resource assets, stock, flows, and economic activity. The third section examines issues involved in accounting for renewable and environmental resources. The chapter then turns to general issues associated with the physical data requirements of environmental accounting and with valuation. We next investigate in greater detail the cases of forests and air quality to illustrate how augmented accounting might actually be done. The chapter ends with the panel's conclusions and recommendations in the area of accounting for renewable and environmental resources. Appendix B identifies potentially useful sources of data for developing supplemental accounts identified by the panel in the course of its investigation. BEA Efforts to Date in Accounting for Renewable and Environmental Resources This section reviews BEA's initial design for its supplemental accounts for natural-resource and environmental assets. A more complete evaluation of BEA's efforts on forests is included later in the chapter. As discussed in Chapter 2, a critical issue involved in the development of augmented accounts is setting the boundary. How far from the boundary of the marketplace should the purview of the environmental accounts extend? Table 4-1 shows BEA's tentative decisions on how it proposed to structure its supplemental accounts (BEA's Integrated Environmental and Economic Satellite Accounts [IEESA] from Bureau of Economic Analysis, 1994a:Table 1). Phase II of BEA's development of supplemental tables focused on assets listed in rows 22-35 and 42-47 of Table 4-1, while Phase III considers rows 48-55. Because BEA has not completed Phases II and III, actual decisions on what will be included have yet to be made. Each of the following sections of this chapter considers an element of how to draw the line. While an ideal set of accounts would contain "everything,"

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TABLE 4-1 IEESA Asset Account, 1987 (billions of dollars). This table can serve as an inventory of the estimates available for the IEESA's. In decreasing order of quality, the estimates that have been filled in are as follows: For made assets, estimates of reproducible tangible stock and inventories, from BEA's national income and product accounts or based on them, and pollution abatement stock, from BEA estimates (rows 1-21); for subsoil assets, the highs and lows of the range based on alternative valuation methods, from the companion article (rows 36-41); and best available, or rough-order-of-magnitude, estimates for some developed natural assets (selected rows 23-35 and 42-47) and some environmental assets (selected rows 48-55) prepared by BEA. The "n.a."—not available—entries represent a research agenda.       Change           Row   Opening Stocks (1) Total, Net (3+4+5)   (2)   Depreciation, Depletion, Degradation (3)   Capital Formation (4)   Revaluation and Other Changes (5)   Closing Stocks (1+2) (6)   PRODUCED ASSETS               Made assets 1 11,565.9   667.4 -607.9 905.8 369.4 12,233.3 Fixed assets 2 10,535.2   608.2 -607.9 875.8 340.2 11,143.4 Residential structures 3 4,001.6   318.1 -109.8 230.5 197.4 4,319.7 Fixed nonresidential structures and equipment 4 6,533.6   290.1 -498.1 645.3 142.9 6,823.7 Natural resource related 5 503.7   23.1 -19.2 30.3 12.0 526.8 Environmental management 6 241.3 8.4 -7.0 10.6 4.7 249.6 Conservation and development 7 152.7 3.6 -4.4 5.3 2.7 156.4 Water supply facilities 8 88.5 4.8 -2.5 5.3 2.0 93.3 Pollution abatement 9 262.4 14.7 -12.2 19.7 7.3 277.1 Sanitary services 10 172.9 12.8 -5.6 13.7 4.8 185.8 Air pollution abatement and control 11 45.3 .6 -4.1 3.5 1.3 45.9 Water pollution abatement and control 12 44.2 1.3 -2.5 2.6 1.2 45.5 Other 13 6,029.9 267.0 -478.9 615.0 130.9 6,296.9

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    Change             Row   Opening Stocks (1)   Total, Net (3+4+5) (2)   Depreciation, Depletion, Degradation (3)   Capital Formation (4)   Revaluation and Other Changes (5)   Closing Stocks (1+2) (6)   Inventories 14 1,030.7 59.3 ................. 30.1 29.2 1,090.0 Government 15 184.9 6.8 ................. 2.9 3.8 191.7 Nonfarm 16 797.3 62.4 ................. 32.7 29.7 859.7 Farm (harvested crops, and livestock other than cattle and calves) 17 48.5 -9.9 ................. -5.5 -4.4 38.6 Corn 18 10.2 .3 ................. -1.1 1.4 10.5 Soybeans 19 5.0 -.1 ................. -1.0 .9 4.9 All wheat 20 2.6 0.0 ................. -.2 .2 2.6 Other 21 30.7 -10.1 ................. -3.2 -6.9 20.6 Developed natural assets 22 n.a. n.a. n.a. n.a. n.a. n.a. Cultivated biological resources 23 n.a. n.a. n.a. n.a. n.a. n.a. Cultivated fixed natural growth assets 24 n.a. n.a. n.a. n.a. n.a. n.a. Livestock for breeding, dairy, drought, etc. 25 n.a. n.a. n.a. n.a. n.a. n.a. Cattle 26 12.9 2.0 n.a. -.3 2.3 14.9 Fish stock 27 n.a. n.a. n.a. n.a. n.a. n.a. Vineyards, orchards 28 2.0 .2 n.a. 0.0 .2 2.2 Trees on timberland 29 288.8 47.0 -6.9 9.0 44.9 335.7 Work-in-progress on natural growth products 30 n.a. n.a. ................. n.a. n.a. n.a. Livestock raised for slaughter 31 n.a. n.a. ................. n.a. n.a. n.a. Cattle 32 24.1 7.5 ................. 0.0 7.5 31.6 Fish stock 33 n.a. n.a. ................. n.a. n.a. n.a. Calves 34 5.0 .9 ................. -.5 1.4 5.9 Crops and other produced plants, not yet harvested 35 1.8 .3 ................. .1 .2 2.1 Proved subsoil assets 36 270.0-1066.9 57.8-116.6 -16.7-61.6 16.6-64.6 58.0- -119.6 299.4-950.3 Oil (including natural gas liquids) 37 58.2-325.9 -22.5-84.7 -5.1--30.6 5.8-34.2 -23.1- -88.3 35.7-241.2 Gas (including natural gas liquids) 38 42.7-259.3 6.6-57.2 -5.6--20.3 4.1-14.9 8.1- -51.8 49.4-202.2 Coal 39 140.7-207.7 2.2-3.4 -5.4--7.6 4.4-6.3 3.2- -2.1 143.0-204.2 Metals 40 (*)-215.3 67.2-29.5 -.2--2.2 2.2-9.2 65.2-22.5 38.5-244.8 Other minerals 41 28.4-58.7 4.3-.8 -.4- -.9 .1-0.0 4.6-.1 32.8-57.9 Developed land 42 n.a. n.a. n.a. n.a. n.a. n.a. Land underlying structures (private) 43 4,053.3 253.0 n.a. n.a. n.a. 4,306.3 Agricultural land (excluding vineyards, orchards) 44 441.3 42.4 n.a. -2.8 45.2 483.7 Soil 45 n.a. n.a. -.5 n.a. n.a. n.a. Recreational land and water (public) 46 n.a. n.a. -.9 .9 n.a. n.a. Forests and other wooded land 47 285.8 28.8 n.a. -.6 29.4 314.6

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      Change           Row Opening Stocks (1) Total, Net (3+4+5) (2) Depreciation, Depletion, Degradation (3) Capital Formation (4) Revaluation and Other Changes (5) Closing Stocks (1+2) (6) NONPRODUCED/ENVIRONMENTAL ASSETS               Uncultivated biological resources 48 n.a. n.a. n.a. n.a. n.a. n.a. Wild fish 49 n.a. n.a. n.a. n.a. n.a. n.a. Timber and other plants and cultivated forests 50 n.a. n.a. n.a. n.a. n.a. n.a. Other uncultivated biological resources 51 n.a. n.a. n.a. n.a. n.a. n.a. Unproved subsoil assets 52 n.a. n.a. n.a. n.a. n.a. n.a. Undeveloped land 53 n.a. n.a. -19.9 19.9 n.a. n.a. Water (economic effects of changes in stock) 54 ................. n.a. -38.7 38.7 n.a. ................. Air (economic effects of changes in stock) 55 ................. n.a. -27.1 27.1 n.a. ................. n.a. = Not available * The calculated value of the entry was negative. Note: Leaders (....) indicate an entry is not applicable. Source: Bureau of Economic Analysis (1994a) Survey of Current Business , April 1994. The table has been slightly simplified for this report.

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this chapter examines practical issues that arise in constructing actual accounts based on available data and tools. As will be seen, the practical is likely to fall far short of the ideal. Pollution Abatement and Control Expenditures One particular entry in the environmental accounts—pollution abatement and control expenditures—has been the subject of detailed investigation by BEA for many years. These items are shown for 1987 in rows 5-12 of Table 4-1. The Bureau of the Census began collecting these data and BEA reporting them in 1972 (with some breaks in the series); these efforts were suspended in 1995 because of budget cuts. Reporting of these costs does not extend the accounts, but rather reorganizes the existing accounts to provide a better indication of the interaction between the environment and the economy. The limitations of these data are well recognized and were discussed in Chapter 2. Many of the costs included in the data overstate the cost of pollution control, while other pollution-reducing costs are omitted because they involve changes in processes. There is also controversy about the extent to which stringent pollution control regulations may have a chilling effect on innovation and technological change. Finally, little thought has been given to the appropriate treatment of purchases of emission permits, which are likely to become a more important feature of environmental regulation in the future. Despite their limitations, however, data on pollution abatement are likely to be among the most precise of the data in the environmental accounts, and they have been extremely useful for understanding trends and levels in control costs and for examining how environmental programs have affected productivity. The panel finds that the data on pollution abatement expenditures are valuable and, as noted in the final section of this chapter, recommends that funds be provided to improve the design and recommence collecting these data. Other Sectors of the Proposed Accounts As reported by BEA, the quality of actual entries in published supplemental accounts for Phase II and III assets ranges from relatively good to conceptually defective.1 For Phase II assets, estimates within the category ''developed land" are described as "of uneven quality" (p. 45). According to BEA, agricultural land values are "relatively good and are based on U.S. Department of Agriculture estimates of farm real estate 1   All quotations in this section are from the Bureau of Economic Analysis (1994a).

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values less BEA's estimates for the value of structures" (p. 45). BEA has not attempted to estimate the value of recreational land, but has entered federal maintenance and repair expenditures as an investment (see Table 4-1) and "assumed that these expenditures exactly offset the degradation/depletion of recreational land" (p. 45). BEA indicates that this assumption is made only for purposes of illustration and is "not to imply any judgment about the true value of degradation/depletion" (p. 45). A more detailed discussion of BEA estimates for timber and land in forests is presented later in this chapter. For Phase III assets, BEA has entered "n.a." for most of the items, indicating that these estimates have not yet been developed. Entries for investment in and degradation of water, air, and undeveloped land are included, however. As in the case of developed recreational land, BEA has assumed that maintenance exactly offsets degradation, noting that this assumption provides entries that "are simply place markers" (p. 46). In the panel's view, the use of maintenance expenditures as degradation costs is highly misleading, and this procedure should not be followed in the future. Entering "n.a." would be more accurate. The panel notes, however, that these estimates do not necessarily reflect BEA's planned approaches, but were included by BEA to show the current state of data and research. Regarding future plans, the United Nations System of Integrated Environmental and Economic Accounting (SEEA) "does not recommend that the stock of air—which is truly a global common—or water be valued; instead it recommends that valuation be limited to changes in these assets—their degradation and investments in their restoration" (p. 46). It should be emphasized that the entries for environmental assets in Table 4-1 are highly oversimplified. Some components of air quality, such as greenhouse gases and stratospheric ozone, are truly global assets and services; others, such as reductions in urban smog, are local and regional public goods. Additional dimensions that need to be incorporated are relations to external events, spatial resolution, and nonlinearities in damages. The discussion of air quality later in this chapter illustrates its multiple dimensions. Similarly, water quality and quantity, undeveloped land, and uncultivated biological resources are composites of many different assets and quality characteristics that provide multiple goods and services. BEA's efforts have focused on the asset accounts. A preliminary table for a production account without entries is included in BEA's report on its development of the IEESA (Bureau of Economic Analysis, 1994a, 1994b). Production of market goods and services from these natural assets—e.g., timber, agricultural crops, fish—is already in the core production accounts. Greater attention is needed to identifying, measuring, and valu-

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ing the specific types of nonmarket goods and services produced by these assets. Pollutant Emissions and Their Relation to Stocks, Flows, and Economic Activity Before constructing environmental accounts, it is necessary to determine the interactions between natural resources and the environment and economic activity. It is essential to understand the key physical flows and stocks and how they affect humans and economic activities and values. A complete accounting requires detailed knowledge of the physical properties of resources and pollutants as described in fate, transport, and impact or damage models, as well as the service flows to market and nonmarket sectors. Figure 4-1 illustrates key relationships among emissions, stocks of pollutants, natural- resource assets, and economic activities in different sectors. As the figure shows, economic activities produce a variety of uninternalized emissions and residuals that find their way into the environment. Many of the pollutants of concern are residuals that also have natural sources—sulfur, carbon dioxide, carbon monoxide, nitrogen compounds—and are emitted during volcanic eruptions, produced by forests and wetlands, or released from wildfires. Other residuals of concern—such as chlorofluorocarbons (CFCs) and many pesticides used in agriculture—are anthropogenic and have no natural sources. In terms of effects on human activities, the sources of the residuals are not important. What may be important is that human activities have increased the levels occurring in the environment, concentrated them to a degree that makes them dangerous, or relocated them to areas where people or economic activities are exposed to them at high levels. Whether from natural sources or human activities, environmental variables can affect economic well-being in three general ways, as illustrated in Figure 4-1: (1) direct effects on consumption or income of households, industry, and government; (2) accumulation in the environment of stocks of residuals that then affect economic activities or economic assets; and (3) effects on the service flows of economic assets (capital stock, natural resources, or human resources), such as recreation, clean air to breathe, and navigable river channels free of sedimentary deposits. Direct Effects Environmental variables affect human and natural systems directly. Urban smog, whose concentrations change daily or even hourly, is an obvious example. Sulfate and nitrate aerosols, pollutants contributing to acid precipitation, remain in the atmosphere for a matter of days. These

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Figure 4-1 Human Activities, Residuals, and Economic Assets. pollutants have short-term health effects, reduce visibility, interfere with recreational activities, affect crop growth, and present their own set of problems for accounting. In many cases, the substances emitted are precursor emissions; that is, they react chemically in the atmosphere with other substances to form the substance that is ultimately damaging to humans or ecosystems. There are also complex nonlinearities because the formation of the damaging substance depends on the level of precursor emissions, weather conditions, and the presence of other substances with which the precursor emissions react. All of these processes vary on an hourly, daily, and seasonal basis. Emissions, concentrations, and impacts of damaging substances also vary spatially, and there may be important threshold effects as well. Above all, there is the "weed syndrome"—the fact that the same substance may be beneficial or harmful depending on where it is, how much of it there is, the time and duration of exposure, and what organism is absorbing it. Virtually every substance on earth, from water to plutonium, can be an economic good or an economic weed depending on the circumstances.

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One of the most important difficulties is that the physical measurements used are often inaccurate indicators of actual human exposures. Average emissions of the precursor pollutant, average concentrations over the year, or concentration data for limited sites are generally not representative of concentrations to which the population is exposed and may be a misleading basis for developing damage estimates. For example, tropospheric ozone forms mainly in warm weather. Thus total annual hydrocarbon emissions, the precursor to tropospheric ozone, are a poor indicator of potential levels of tropospheric ozone. Tropospheric ozone levels also very significantly over the distance of a few city blocks. One of the major challenges both for better environmental policy and for the construction of environmental accounts is to obtain better measures of direct human exposure to the important harmful substances among a representative sample of people. Accumulation of Stocks Many environmental problems result from the accumulation of residuals. These substances include most radiatively active trace gases, which remain in the atmosphere for decades or centuries, and many radioactive materials, which have half-lives of decades or centuries. Similarly, recovery from stratospheric ozone depletion is a process requiring years or decades. And agricultural chemicals often migrate very slowly through soils, contaminating drinking water only after several years or decades. Environmental accounting therefore needs to develop and include appropriate methods to account for those persistent pollutants, such as heavy metals that accumulate in the environment and last for many years. Each year's emissions or production of residuals adds to the stock in the environment, and it is necessary to understand the processes by which these stocks decay or dissipate. In some cases (as with radioactive substances), those processes are easily understood, while in other cases (such as subsoil toxins or the carbon cycle), understanding the processes poses enormous scientific challenges. In the economic accounts, the stock-flow dynamics are similar to those of gross investment and depreciation of capital. While there is a conceptual similarity, however, there is no readily observable market price for these stock changes. Hence, valuation of a change in stock requires estimating the value of the impact of additions over the lifetime of the stock, accounting for dissipation, and appropriately discounting future effects. It should also be recognized that, with a few exceptions, the stocks are extremely heterogeneous, so that measuring a simple "environmental capital stock" is likely to be extremely difficult.

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Effects on Economic Assets Both short-lived and long-lived residuals can affect economic activity over a number of years through their effects on other economic assets, in particular produced capital goods such as buildings and equipment. For example, acid precipitation can cause deterioration of buildings. Accumulated greenhouse gases can result in coastal flooding and higher storm surges, thereby adversely affecting the value of existing coastal structures. Pollutants such as lead can cause long-lasting health consequences, impacts on intellectual functions, and premature death. Issues Involved in Accounting for Renewable and Environmental Resources The previous section addressed the major ways in which natural resources and the environment interact with economic activity. Depending on the intended uses of the data, there are different approaches to structuring environmental and natural-resource accounts. The most complete accounting structure would treat all the relationship in Figure 4-1. However, constructing such a complete set of accounts is infeasible today, and governments must choose areas for investigation strategically in accordance with their national economic and environmental goals and interests. This section delineates some possible approaches to accounting for natural and environmental resources and activities. Production and Income Accounts A complete set of production accounts would identify all the cross-relationships among industry, household, government, and natural sources of emissions or residuals, as well as the nonmarketed current account input services provided by nature and the productive contribution of nature to final demand. Current-year activities would include production of residuals, just as traditional economic accounts include production accounts. A complete set of accounts would incorporate flows of residuals from abroad, similar to imports of goods and services. It would also be necessary to calculate the "price"—negative or positive—indicating whether the effect was adverse or beneficial. The accounting for current-year activities would include final uses of residuals, identifying effects on final consumption, flows abroad, and contributions to capital stocks, just as traditional accounting frameworks identify final consumption of goods and services, exports, and gross capital accumulation.

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environmental accounts. It also presents issues for environmental accounting similar to those encountered with other environmental assets, such as water quality and climate change. Severely degraded air quality in many cities of the United States in the 1960s generated a number of federal regulations during the early 1970s designed to reduce emissions of pollutants that contributed to this degradation. Air quality has many dimensions, and early regulations focused on some of the more obvious and easily addressed problems. As scientific research further illuminated the less immediately obvious impacts of degraded air quality, such as chronic effects on health, these earlier controls were tightened, and new regulations addressed a wider range of pollutants. The first subsection below examines the various market and nonmarket impacts of air quality. The second reviews some major pollutants that result in degradation of air quality and their primary physical effects. This is followed by review of a recent attempt to estimate comprehensively the benefits associated with improvements in air quality. The fourth subsection addresses the relevance of these damage estimates to environmental accounting. The section ends with the panel's conclusions on accounting for air quality. Air Quality Impacts on Market and Nonmarket Activities Degraded air quality can have a harmful effect on both market activities (e.g., reduced crop yields or lost work-days) and nonmarket activities (e.g., losses due to illness beyond those related to paid labor, such as those to retired persons, and reduced amenities in recreational facilities). These air quality effects belong in the production accounts of environmental accounts. Moreover, degraded air quality can affect the value of natural-resource assets (e.g., acid deposition damage to forests), can cause deterioration of physical capital (e.g., damage to the exterior of buildings), and has long-term health impacts that affect human capital (e.g., premature death and effects of lead on measured IQ of children). Such effects might be included in the asset component of environmental accounts. With assets as with production, there are both market and nonmarket effects: market impacts include capital asset deterioration and forest timber loss, while nonmarket impacts include lost value due to damaged landmarks or degradation of forests for recreational purposes. Major Air Pollutants and Their Health and Ecological Effects Table 4-5 lists some important health and ecological effects of exposure to six air pollutants for which the U.S. Environmental Protection Agency (EPA) has established National Air Quality Standards—carbon

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TABLE 4-5 Environmental Protection Agency's Six Criteria Air Pollutants Pollutant Trends (1986-1995)   Major Effects Leading Source Ground-level ozone (O3)   Respiratory illness/lung damage Transportation* (37%) Concentration -6% Crop/forest damage Solvent utilization (28%) Emissions -9% Building/material damage       Visibility problems   Carbon monoxide (CO)   Reduced oxygenation of blood Transportation (81%) Concentration -37% Heart damage   Emissions -16%     Sulfur dioxide (SO2)   Respiratory illness Electric utilities (66%) Concentration -37% Building/material damage (acid rain)   Emissions -18% Crop/forest damage       Visibility problems   Nitrogen dioxide (NO2)   Respiratory illness/lung damage Transportation (49%) Concentration -14% Building/material damage (acid rain) Electric utilities (29%) Emissions -3% Crop/forest damage       Visibility problems   Lead (Pb)   Infant mortality Metals processing (smelters, battery plants) (39%) Concentration -78% Reduced birth weight Transportation (31%) Emissions -32% Childhood IQ loss       Hypertension       Heart attacks   Particulate matter (PM-10)   Lung disease Fugitive dust (68%) Concentration -22% Mortality Agriculture and forestry (20%) Emissions -17%     * Based on volatile organic compounds (VOC) emissions. Source: U.S. Environmental Protection Agency (1996). monoxide, ground-level ozone, lead, nitrogen dioxide, particulate matter, and sulfur dioxide. These chemicals are sometimes referred to as ''criteria pollutants." In addition, there are many other constituents of the atmosphere that may have impacts of economic consequence. Table 4-6 lists some other components of air pollutants, including air toxins (e.g., benzene), stratospheric ozone depleters (e.g., CFCs), and greenhouse gases

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TABLE 4-6 Other Pollutants of Air Quality Identified by Environmental Protection Agency Pollutant Major Effects Leading Source Air toxins (188 in total, e.g., dioxins, benzene, arsenic, beryllium, mercury, vinyl; chloride) Thought to cause cancer or other serious health effects, such as birth defects or reproductive effects Ecosystem damage (particularly freshwater fish) Transportation, wood combustion, chemical plants, oil refineries, aerospace, manufactures, dry cleaners Stratospheric ozone depleters (e.g., chlorofluorocarbons [CFCs], halons, carbon tetrachloride, methyl chloroform) Skin cancer Cataracts Suppression of the immune system Ocean food chain stresses Fossil fuel, industrial cleaners Greenhouse gases (e.g., carbon dioxide, methane, halogenated fluorocarbons [HFCs]) Broad-scale changes in temperature and precipitation affecting agriculture, health, water resources, recreation, ecosystems Sea level rise Fossil fuel, combustion, landfills   Source: U.S. Environmental Protection Agency (1996). (e.g., carbon dioxide and methane). As indicated, EPA has identified 188 air toxins alone. Exposure to air pollution has a wide range of impacts, including respiratory illnesses (which result from ground-level ozone, sulfur dioxide, nitrogen dioxide, particulate matter, and air toxins); child IQ loss, infant mortality, strokes, and heart attacks (which result from lead); skin cancer (which is the indirect consequence of stratospheric ozone depleters); and increased mortality (resulting from particulate matter, lead, and air toxins) (see Pearce et al., 1996). Ecological effects include impacts on agricultural, forest, and aquatic ecosystems. Airborne chemicals have both positive and negative effects on production of marketed goods and services. Ground-level ozone harms crops, while nitrogen deposition and carbon dioxide enhance plant and timber growth. Ground-level ozone and sulfur dioxide reduce crop yields and timber growth, while air toxins and sulfur dioxide reduce freshwater fish yields. In other cases, atmospheric trace gases have subtle effects that will occur far in the future affecting

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biological diversity (for greenhouse gases) or ocean food web stresses, and ultimately causing severe sight damage for many mammals (for stratospheric ozone depleters). Table 4-5 also shows the change in emissions and sampled concentrations of EPA's six criteria pollutants from 1986 to 1995.11 Primarily as a result of the Clean Air Act and the Clean Air Act Amendments, emissions of the six primary pollutants have decreased substantially. For example, installing scrubbers and switching to low-sulfur coal caused a 19 percent decline in emissions from coal utility plants, which in turn resulted in an overall 18 percent decline in sulfur dioxide emissions from 1986 to 1995. A 16 percent decline in carbon monoxide emissions during the same period resulted primarily from a 20 percent decline in carbon monoxide emissions of on-road motor vehicles. Similarly, a 32 percent decline in lead emissions was primarily a result of the ban on leaded gasoline. Declines in nitrogen dioxide (14 percent) and ground-level ozone emissions (6 percent) were less dramatic, but are expected to become more pronounced as the Clean Air Act Amendments of 1990 become effective. For example, reformulated fuel requirements (for oxygen and volatility) for on-road vehicles are likely to reduce carbon monoxide and ground-level ozone emissions. Similarly, the Acid Rain Program (Title IV) requires a 40 percent reduction in sulfur dioxide and a 10 percent reduction in nitrogen dioxide emissions from 1980 to 2010. Particulate matter may be more difficult to control given that almost 70 percent of anthropogenic-related emissions result from fugitive dust (e.g., unpaved roads), with an additional 20 percent coming from agriculture and forestry. The declines in emissions are, of course, linked to lower concentrations of the six primary pollutants. Whereas emissions are estimated on the basis of industrial activity, technology, fuel consumption, and vehicle miles traveled, concentrations of pollutants are measured at selected monitoring sites across the country. Based on these measurements, estimated airborne concentrations of lead have fallen by 78 percent since 1986, while concentrations of airborne carbon monoxide, sulfur dioxide, and particulate matter have fallen by 37, 37, and 22 percent, respectively. Smaller declines occurred for ground-level ozone and nitrogen dioxide (6 and 14 percent, respectively). Data on other air chemicals vary widely. Excellent data are available on emissions and concentrations of many of the greenhouse gases (particularly carbon dioxide) and stratospheric ozone destroyers. EPA pres- 11   Data prior to 1986 exist, but cannot be directly compared with data collected from 1986 on because of changes in data collection (see U.S. Environmental Protection Agency, 1996, for more details).

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ently monitors national ambient concentrations for few of the 188 air toxins identified in the Clean Air Act Amendments. Rather, the agency sets technology-based performance standards to control emissions of these substances. As a result, EPA has only begun developing a National Toxins Inventory. Monetized Benefits of Clean Air Regulations Although a great deal of work has been done on valuing components of air quality, there is currently no comprehensive measure of the economic impacts of air pollution for the United States. However, a recent EPA study evaluating the economic costs and benefits of clean air regulations provides a useful benchmark that sheds light on this issue (U.S. Environmental Protection Agency, 1997). The estimates given are subject to many uncertainties due to the difficulty of estimating exposure and the incidence of effects related to exposure and valuing the effects. In addition, data on air toxins have only recently become available, making it difficult to develop comparable estimates for these pollutants. The EPA study includes no physical or monetary assessments of the impacts of changes in air quality on ecosystem health, physical capital, or global public goods, such as slowing climate change and preventing ozone depletion. Moreover, many of the estimates of benefits, particularly those involving the valuation of health benefits and the discount rate, have been the subject of major criticism (see Clean Air Act Council on Compliance, 1997). Notwithstanding these limitations, the EPA study provides an indication of the overall economic importance of changes in air quality, as well as a sense of the relative importance of the various air pollutants and the impacts on different sectors. The study estimates the economic benefit of actual air pollution relative to a counterfactual baseline that assumes no controls imposed after 1970; roughly speaking, the counterfactual is for emissions to grow with the economy, rather than declining as described above. The major result presented is that the economic benefits of reduced air pollution in 1990 are estimated to be worth $1,248 billion. Reduced mortality benefits ($1,004 billion) account for 80 percent of this total; together, avoided human health effects account for 99 percent of the total. In addition, benefits of improved visibility are estimated at $3.4 billion, those of reduced household soiling at $4.0 billion, and those of increased agricultural income from reduced yield losses due to ozone at about $1.0 billion. With regard to specific pollutants, most of the benefits are attributed to reductions in particulate matter (PM-10) and lead; the benefits of ozone reduction are estimated to be only on the order of $2 billion.

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Caution is warranted in drawing too many conclusions from these estimates and comparisons. Certain assumptions might have had the effect of exaggerating the economic benefits, and there are major uncertainties about the health impacts, particularly because of weaknesses in human exposure data. Moreover, the study omits some of the major effects of acid deposition on forests, lakes, and buildings, and the impact of tropospheric ozone on ecosystems is not valued. The figures presented should therefore be viewed as order-of-magnitude estimates. Even with all these qualifications, however, it appears that the economic impacts of air quality on human health are highly significant. Air Quality Benefits and Supplemental Accounts The estimates of the benefits of pollution control just discussed reflect the value of changes in the level of air pollutants resulting from proposed regulations. They are relevant for regulatory or cost-benefit purposes, but they are not the appropriate values for economic accounts. Production accounts should measure the damages associated with remaining levels of pollution, in terms of both production accounts and change in asset values. This difference between abatement and residual damage can be quantitatively large. For example, ozone concentrations fell only 6 percent between 1986 and 1995. As a result, regardless of the benefits of preventing higher levels of ozone than those of 1986, the value of changes in ozone concentrations over this period would be relatively small. In contrast, lead and PM-10 concentrations fell 78 and 22 percent, respectively, over the same period, and consequently the damages from these chemicals would be much smaller in 1995 than in 1986. In other words, whereas comprehensive consumption would have a substantial negative entry due to lead and PM-10 in 1986, the negative values would be of much smaller magnitude in 1995. The result might be a substantial increase in the estimate of growth of comprehensive consumption over this period. As discussed earlier, air pollution affects production activities, assets, and nonmarket activities. Most of the estimates from the EPA study refer to the production accounts: days of work lost, shortness of breath and acute bronchitis, loss of visibility, and crop losses are effects on production activities. Crop losses and the output losses from lost work-day are already included implicitly in the accounts because these relate to market activities. Supplemental accounts that would identify these losses separately would serve to connect them specifically to air pollution. The estimates for shortness of breath and acute bronchitis include both damages that may already be reflected in the production accounts (i.e., re-

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duced worker productivity while on the job) and damages that would be reflected only if the accounts were expanded to include household production (e.g., impacts on tennis and jogging). Many of the effects not estimated by EPA, such as those of acid deposition on forest health, freshwater quality, or ecosystem function, would also include effects on both market activities already in the accounts, such as timber or commercial fishing, and nonmarket goods, such as recreation. Asset effects present greater complexity, as was seen above for the case of forests. Some impacts, such as those on soil or fish farms, would be reflected in the market value of these assets. Others, such as mortality and chronic bronchitis, are long-term effects on human resources. These effects would require adjustments in the asset accounts if a full set of asset accounts for human health and capital were constructed. One particular concern arises if the accounts are to include the impact of air pollution on human health. The impact of air pollution and other environmental activities on human health is often taken out of the context of other health-related activities. If one were to track environmental trends alone, it might be concluded that until the 1970s, growing environmental problems were leading to a deterioration in the health status of Americans. This conclusion is, in fact, incorrect. Activities outside the environmental arena—including improved sanitation, vaccinations, and public-health measures—led to improved life expectancy over the first seven decades of this century. It would therefore be misleading to enter only a large health negative into a set of augmented income accounts. The positives and negatives in the environmental entry in a set of health accounts would have to be placed in the context of the vast changes in health status of the American population. Conclusions on Air Quality The basic finding emerging from the above discussion is that air quality is likely to be a major nonmarket effect. While EPA's estimates of benefits of $1.2 trillion per year due to reduced air pollution are highly uncertain, do not include all effects, and measure a somewhat different concept than would be appropriate for the accounts, it is likely that a realistic assessment of reduced damages due to improved air quality would yield a much larger figure than the $27.1 billion in air pollution control expenditures used by BEA as a placeholder. In the panel's view, no other area of natural-resource and environmental accounting would have as great an impact as the potential correction from air quality. The magnitude of this impact indicates that the development of supplemental accounts for air quality is a high priority. Indeed, the overall review of

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augmented accounting in Chapter 2 reveals only a few areas close in importance, such as the value of leisure, health status, and nonmarket educational investments. At the same time, air quality is a most elusive concept since it has so many different components. To include these effects in the accounts, several data and measurement obstacles must be overcome. First, determination of the physical impacts of changes in air quality, generally estimated through dose-response functions, should be focused on the effects of actual human exposure to air pollution. Second, the damage estimates must separate the market effects of changes in air quality that are currently captured in the accounts (lost productivity) from the nonmarket effects that are not currently captured (lost leisure activities). Third, there is a need for reliable and objective physical and monetary damage estimates associated with exposure to air pollutants, including air toxins, ozone depleters, and greenhouse gases. Fourth, significant data gaps with respect to the impacts of air pollution and changes in air quality on ecosystem health must be filled. And finally, the estimates must represent year-to-year changes, rather than changes from a hypothetical level of pollution without regulations. Developing a set of accounts in this area, along with the associated physical measures and valuations to apply to those measures, is a major long-run task for the nation. This task far transcends the scope and budget of BEA, and much of the necessary work lies outside BEA's specialized expertise. The task for the short run, therefore, is to continue basic research on the underlying science and economics of estimating the benefits of public goods such as clean air. Many years of concerted research are likely to be required before the materials for a set of augmented accounts in this area are available. But the payoff from the research would be large, not only in producing the raw materials for improved environmental accounts, but more important in proving the data and analysis needed for improved public policy concerning the environment. In short, the task of constructing environmental accounts for important public goods should be part of a more general goal of improving the nation's information and analytical systems in this area. Conclusions and Recommendations on Renewable and Environmental Resources General Approach 4.1 The panel recommends that BEA continue its work toward accounting for changes in natural-resource assets and for the flow of services from these assets.

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Environmental variables affect economic well-being in three major ways: direct effects on consumption or income of households, industry, and government; accumulation in the environment of stocks of residuals that then affect economic activities or economic assets; and effects on the service flows of economic assets, including capital stock, natural resources, and human resources. The main value of natural-resource accounting is in providing a complete picture of the role these resources play in the economy. Sometimes this information can be used to judge the overall sustainability of the use of resources, while at other times it can be used to manage natural and environmental resources and to inform public policy choices. Valuation 4.2 For valuation, the panel recommends that BEA rely primarily on market values or proxies of market values that are based on actual behavior. Contingent valuation, while sometimes useful for other purposes, is currently of limited value for environmental accounting in the context of the economic accounts. Valuing environmental goods and services requires distinguishing between private and public goods. Market prices provide the marginal valuations for private goods, but determining the value of public goods requires the summation of individual values. Moreover, there may be no behavioral traces for individual valuation of public goods. Price data are relatively reliable for private market goods produced from forest and agricultural assets, such as timber stumpage, livestock, and land use and quality. Values for near-market goods—those that have direct counterparts in the market—can be constructed by comparing the near-market goods with their market counterparts, adjusting for quality as necessary. Techniques for valuation of public goods are still under development. Some techniques—such as hedonic or travel-cost studies—rely on behavioral or market-based estimates; while these estimates are subject to significant measurement errors, they are conceptually appropriate in economic accounts. Other techniques, such as contingent valuation, are not based on actual behavior, are highly controversial, and are subject to potential response errors. Quantitative Data 4.3 Quantitative data on many natural-resource assets are currently relatively adequate. However, the data on many environmental variables are at present poorly designed for the construction of environmental accounts. The panel recommends that greater emphasis be

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placed on measuring effects as directly as possible. Of particular importance are measures of actual human exposure to air and water pollutants, rather than modeled measures of exposure based on ambient pollutant levels at current monitoring sites. Quantitative data for natural resources are often of high quality relative to the other quantitative data in the NIPA because there are well-established units of measure for many natural resources. Quantitative data on near-market activities such as fuel wood for own use are conceptually straightforward, and many of these data are currently collected by federal agencies. Measurement of nonmarket goods and services and explicit accounting for quality changes, particularly for those that have public-good characteristics, are currently subject to severe methodological difficulties and insufficient data. There are relatively good data on emissions of many residuals from industrial and human activities, but for most harmful pollutants except lead there is very little systematic monitoring of human exposures. Inclusion of Public Goods 4.4 The panel finds that more work will be needed on techniques for establishing production flows and values for the assets and services of public goods to place them on a comparable basis with the prices and quantities used in the core accounts. True public goods, for example biodiversity, species preservation, and national treasures such as the Florida Everglades and Yellowstone National Park, present severe conceptual and measurement issues for incorporation into a national accounting system. Data Collection 4.5 The panel encourages BEA to help mount a concerted federal effort to identify the data needed for measuring changes in the quantity and quality of natural-resource and environmental assets and associated nonmarket service flows. Many different federal agencies collect data or have expertise that will be essential to BEA, particularly as its efforts expand to include Phase III assets and associated flows. BEA already cooperates with other agencies in collecting data for the core accounts; supplemental environmental accounts will require cooperation with, for example, the Environmental Protection Agency, the Department of Agriculture, the Department of the Interior, the Bureau of Labor Statistics, the Bureau of the Census, the Energy Information Administration, the National Institute of Environmental Health Sciences, and the Department of Health and Human Services.

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Regional Resolution 4.6 The panel recommends BEA focus on developing supplemental accounts for the nation as a whole as a first priority. At the same time, BEA should preserve regional detail where it exists so that these data are available for analysts interested in developing accounts at the regional level. The development of national estimates will require sampling, measurement, and valuation techniques that reflect the fact that the quality and value of natural-resource assets and associated flows vary geographically. While some assets and flows may not be important to the national economy, they could be far more important to regional and local economies. Next Steps 4.7 The panel recommends that funds be provided to reinitiate and improve the design of the collection of data on pollution control and abatement expenditures. 4.8 As BEA further develops its natural-resource and environmental accounts, an important step is to incorporate near-market goods and services—those that have close counterparts in marketed goods and services. There is a clear basis here for measuring quantities and establishing values in a manner comparable to that used for the core accounts. 4.9 Construction of a set of forest accounts is a natural step in developing integrated economic-environmental accounts. The United States has much of the data needed for such an effort, and the analytical techniques are relatively well developed. 4.10 Based on available information, the economic impacts of air quality are likely to be the most significant element in the environmental accounts; development of such accounts is a central task for environmental accounting. At the same time, because of the unresolved conceptual issues and the need for appropriate physical measures, the development of stock and flow accounts for air quality and other important public goods poses awesome difficulties. This task far transcends the scope, budget, and expertise of BEA. A major goal for the near term is to continue basic research on the underlying science and economics in this area.