5
Overall Appraisal of Environmental Accounting in the United States

This chapter contains the panel's overall conclusions and recommendations, which are based on the analysis and findings presented in previous chapters; specific conclusions and recommendations related to accounting for subsoil mineral resources and for renewable and environmental resources are presented in Chapters 3 and 4, respectively. The sections that follow address in turn the basic questions that arise in constructing integrated environmental and economic satellite accounts, the budgetary implications of developing environmental accounts, and issues of data and implementation.

Future Directions for the U.S. Integrated Environmental and Economic Accounts

This section presents the panel's overall conclusions and recommendations with regard to eight key questions related to the construction of integrated environmental and economic accounts:

    1.  

    What is the role of natural-resource and environmental accounting?

    2.  

    What is the value of augmented nonmarket accounts?

    3.  

    Should the Bureau of Economic Analysis (BEA) resume work on the Integrated Environmental and Economic Satellite Accounts (IEESA)?



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5 Overall Appraisal of Environmental Accounting in the United States This chapter contains the panel's overall conclusions and recommendations, which are based on the analysis and findings presented in previous chapters; specific conclusions and recommendations related to accounting for subsoil mineral resources and for renewable and environmental resources are presented in Chapters 3 and 4, respectively. The sections that follow address in turn the basic questions that arise in constructing integrated environmental and economic satellite accounts, the budgetary implications of developing environmental accounts, and issues of data and implementation. Future Directions for the U.S. Integrated Environmental and Economic Accounts This section presents the panel's overall conclusions and recommendations with regard to eight key questions related to the construction of integrated environmental and economic accounts: 1.   What is the role of natural-resource and environmental accounting? 2.   What is the value of augmented nonmarket accounts? 3.   Should the Bureau of Economic Analysis (BEA) resume work on the Integrated Environmental and Economic Satellite Accounts (IEESA)?

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4.   Should the United States pursue a phased or comprehensive approach to augmented national accounts? 5.   Should the IEESA be developed in the core or satellite accounts? 6.   What is the relationship of the IEESA to the United Nations System of Environmental and Economic Accounts (SEEA)? 7.   What are appropriate techniques for measuring quantities and values for nonmarket activities in the national accounts? 8.   What should be the next steps in extending the IEESA? 1. What Is the Role of Natural-Resource and Environmental Accounting? BEA has developed integrated environmental and economic accounting in response to Presidential directives, as well as the growing interest in and importance of the subject (see Bureau of Economic Analysis, 1994a). Work on environmental accounting has been conducted over the last quarter-century under several administrations. Environmental accounting was introduced during the Ford Administration, when Secretary of Commerce Elliott Richardson called for environmental accounting to track capital investment expenditures on pollution abatement. This initiative was further developed by the Carter Administration. In 1990, the Council of Economic Advisers under President Bush recommended that BEA expand its work on environment-economy interactions. And in 1993, BEA was given a mandate by the Clinton Administration to develop first-phase resource accounts within the framework of the national accounts and to pursue construction of the IEESA. Natural-resource and environmental accounting has been studied extensively by the United Nations and the European Union and is currently an area of intensive research in all major countries.1 Many countries have developed additional accounts for minerals, forests, and pollution-control expenditures. The broad-based research that has been conducted on environmental accounting is an indication of the high priority assigned to the development of integrated environmental and economic accounting in the United States and other countries. As discussed further below, better natural-resource and environmental accounts would provide valuable insights into the interaction between the environment and the economy. They would also provide information 1   The Organization for Economic Cooperation and Development (OECD) Council of Environment Ministers, the United Nations Conference on Environment and Development, the heads of government of the Group of Seven, the ''London Group" of National Income Accountants, and numerous other international bodies have recommended that nations develop integrated environmental and economic accounts.

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on the implications of public and private investment and consumption decisions, and help determine whether the nation is running down its stocks of natural resources and environmental assets in an unsustainable manner. Better accounts can inform the nation about the implications of different regulations, taxes, and consumption patterns and thereby lead to more efficient economic, environmental, and natural-resource policies. There is also a close connection between current approaches to augmented income and product accounts and measures of sustainable income. As discussed in Chapter 2, properly constructed national income and output can be interpreted as the maximum sustainable per capita consumption. Ideal measures of sustainable income include all consumption items (including the values of nonmarket consumption), along with the value of changes in the stocks of different assets. These ideal measures of national output and sustainable income can serve as a useful guide to the United States as it improves its national accounts by extending their boundaries. 5.1 The panel concludes that extending the National Income and Product Accounts (NIPA) to include assets and production activities associated with natural resources and the environment is an important goal for the United States. Environmental and natural-resource accounts would provide useful data on resource trends and help governments, businesses, and individuals better plan their economic activities and investments. The rationale for augmented accounts is solidly grounded in mainstream economic analysis. BEA's activities in developing environmental accounts (IEESA) are consistent with an extensive domestic and international effort to both improve and extend the NIPA. 2. What Is the Value of Augmented Nonmarket Accounts? Developing natural-resource, environmental, and other nonmarket accounts is an investment in better information for the nation. Well-designed environmental accounts can overcome the recognized shortcomings of the current market-based accounts and provide information about the interaction between the economy and the environment that would support private and public decisions. There are three principal reasons why developing a set of environmental and nonmarket accounts would benefit the nation. First, comprehensive accounts give a complete picture of economic activity; by contrast, traditional national accounts, which cover only market transactions, provide a misleading indicator of economic activity. Comprehensive accounts contribute to a better understanding of the functioning of the economy and of the interaction between the economy and

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the natural environment. Businesses and governments need and want to know about basic market conditions in the world, the nation, and their region. Without good market and nonmarket information, firms are flying blind. There are many examples of how conventional accounts send misleading signals about economic activity. When companies discover large deposits of oil, gold, and other mineral assets, these are not counted in the nation's investments or as increases in its wealth. Similarly, even though forests contribute greatly to the nation's well-being, only timber production is counted in the national output. the value of hunting, fishing, and other forms of nonmarket forest recreation is not counted as part of the national output even though the total economic contribution of these nonmarket forest outputs probably exceeds the value of the timber production (see Chapter 4). Outside the environmental sector, traditional accounts provide misleading estimates of economic activity because they omit nonmarket production and investment in important areas such as human capital and education and nonmarket work at home. The largest distortion in the environmental area probably arises in the sectors relating to environmental quality. Economic studies reviewed in Chapter 4 indicate that the nation is devoting more than $100 billion annually to pollution abatement and control expenditures. Yet many of the economic benefits derived from these expenditures are omitted from the national accounts. Even though investments in clear air and water produce benefits in improved health of the population, improved functioning of ecosystems, improved recreational opportunities, and lower property damages, virtually none of these benefits are captured by current market-based economic accounts. Second, environmental accounts would provide important information for management of the nation's public and private assets and for improved regulatory decisions. For example, enhanced natural-resource and environmental accounts can provide useful information on natural assets under federal management. Better information on the value of minerals on federal lands would be useful in determining appropriate royalty rates and leasing policies for resources not allocated through competitive auctions. For renewable resources, better information on the stumpage value of timber in national forests would be useful not only for accounting purposes, but also for improved management of these forests and for decision making on the balance of different uses among timber harvesting, wilderness preservation, recreation, and other uses. Better information on fisheries would be valuable to federal agencies responsible for management of these assets. In the case of environmental resources such as air and water quality, a comprehensive set of environmental accounts would provide useful

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information on the economic returns the nation is reaping from its environmental investments. The contrast between private and public investments is instructive in this regard. When a private company invests in an automobile factory or a power plant, company accounts can be used to estimate the economic costs and benefits of that investment. In contrast, even though the nation has allocated more than $1 trillion to environmental, health, and safety investments over the last quarter-century, it has no accounts by which to reckon the returns to those investments. Improved environmental accounts would also provide essential information for sound benefit-cost analyses in regulatory decision making. One of the most serious weaknesses in the U.S. environmental database is the lack of comprehensive and reliable data on actual human exposures to major pollutants. Better information on physical emission trends, human exposures, and the economic impacts and damages due to air and water pollution would be valuable for expanded accounting measures of productivity. Hence, both the underlying information and the aggregate dollar estimates in environmental accounts would provide valuable information for ensuring that the nation's environmental regulations pass an appropriate cost-benefit test. Third, investing in improved accounts would have a high economic return for the nation. The federal government currently invests substantial amounts in collecting, analyzing, and distributing statistical data on the nation. Provision of statistical data is an investment because information is a public good. The gathering of high-quality, comprehensive, and timely data on economic activity requires the resources and data-collection abilities of the government. But the federal government has to date invested very little in the development of nonmarket economic accounts. And while many in the private sector have attempted to construct such accounts, private researchers have neither the resources nor the data required to do so. As a result, the United States today has no set of comprehensive economic accounts, public or private. There are many examples of the economic benefits of comprehensive economic accounts. One area in which environmental data have proven valuable is analysis of the relationship between environmental regulation and productivity. A second area involves improving understanding of the costs and benefits of environmental regulations. Existing data and studies do not provide sufficient detail to allow pollutant-by-pollutant or sector-by-sector estimates of costs and benefits. Improved accounting systems for the environment can help sharpen both estimates and regulatory tools so that pollution control investments can be more effectively allocated. Yet a further important application with substantial potential value for the nation is management of our public lands. An area of growing importance is analysis of the economic costs and

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benefits of steps to slow greenhouse warming. The United States is considering a major commitment to reduce its greenhouse gas emissions. Better estimates of the sources and sinks of these gases, particularly in forests, could help reduce the costs of meeting this commitment. This area represents one of the most dramatic examples of the benefits of establishing comprehensive nonmarket physical and economic accounts, involving potential savings to the nation in the tens of billions of dollars annually. 5.2 The panel concludes that developing a set of comprehensive nonmarket economic accounts is a high priority for the nation. Comprehensive accounts would address such concerns as environmental impacts, the value of nonmarket natural resources, the value of unpaid work, the value of investments in human capital, and the uses of people's time. A set of comprehensive accounts would illuminate a wide variety of issues concerning the economic state of the nation. 3. Should BEA Resume Work on the Integrated Environmental and Economic Satellite Accounts (IEESA)? The central issues discussed in this report are whether BEA's IEESA represent a useful activity for the United States and whether work on the IEESA should resume. In addressing these issues, the panel is concerned that, particularly since the congressional stop-work order of 1994, the United States has fallen behind in developing environmental and other augmented accounting systems. The United States has in place today only the bare outline of a set of extended environmental accounts, with numerical estimates limited to subsoil mineral assets; the nation has no set of satellite environmental accounts, no physical accounting system, and no environmental input-output system.2 In weighing future directions for environmental accounting in the United States, the panel offers three general conclusions, which are followed by three associated recommendations. First, it is clear that there are many alternative approaches to natural-resource and environmental accounting. Given BEA's expertise, along with its limited resources, BEA's phased approach is a reasonable alternative. As noted earlier, 2   The Netherlands and Denmark have done considerable work on the requirements and construction of an environmental input-output system. This work would be useful in understanding the data requirements for an input-output system for the United States. Fostering the development of such data will be an impetus for developing input-output models. See de Boo et al. (1991) and Jensen and Pedersen (1998).

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however, the shortcoming of the phased approach is that it is looking only where the lights are brightest and not where the needs are greatest. It is important, therefore, for the United States to develop the accounts in areas not illuminated by the bright light of market transactions. Developing a comprehensive set of nonmarket accounts is the most promising alternative to such a limited focus. In a country of the size, diversity, complexity, and wealth of the United States, providing this information is an essential function of government and one the federal government is supporting insufficiently at present. Second, the task of developing a comprehensive set of nonmarket accounts for the United States is a large undertaking that would stretch the scope and specialized expertise of BEA. Moreover, if undertaken within the resources currently projected, such a task would clearly result in cutting back other important functions and proposed improvements planned by BEA. The panel therefore cautions that any serious attempt to develop environmental accounts will require additional funding. One potential approach, discussed in detail in the final section of this chapter, would be for BEA to undertake this project jointly with other agencies that are oriented to natural-resource and environmental issues. These agencies have considerable expertise in the analysis of environmental and nonmarket activities and would be useful partners in providing the data and developing prototype systems for nonmarket accounts. Third, the panel is mindful of BEA's important mission and of the precious nature of the data on marketed economic activity it provides. In addition to providing key macroeconomic data and information on different sectors of the economy, BEA has been highly innovative in introducing new approaches, such as improved price and output indexes, and in enhancing the quality of its data on services and international transactions. These data cannot be provided by the private sector and are an important public good. The panel therefore emphasizes that appropriate support for these core activities of BEA is of paramount importance. Activities to develop environmental accounts should be incremental to ongoing activities and improvements and should not come at the expense of core activities. We recommend below that support not be at the expense of BEA's core activities. It is also important that the relevant work of other agencies in supporting these activities (such as the Bureau of the Census, the Bureau of Labor Statistics, the Environmental Protection Agency, and the U.S. Department of Agriculture) be adequately supported. 5.3a The panel was charged to analyze BEA's initial effort in constructing its environmental accounts. Having reviewed existing studies by BEA and other U.S. agencies, by other national statistical agencies,

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by international agencies, and by private researchers, the panel concludes that BEA should be commended for its initial efforts in developing a prototype set of environmental accounts for the United States. With very limited resources, it has prepared a set of useful subsoil mineral accounts. BEA's methodology is based on widely used and generally accepted principles, and the agency has relied on sound and objective measures in developing these prototype accounts. 5.3b Developing a full set of natural-resource and environmental accounts would contribute significantly to understanding of the interactions between economic activity and the environment in the United States. Improved accounts would allow a better understanding of productivity, sustainability, and the environment; they would facilitate better forecasting of future trends and allow the nation to plan for potential critical shortages or environmental problems; and they would enable better public and private decisions on managing the nation's resources. 5.3c Congress should authorize and fund BEA to recommence its work on IEESA development. At the same time, appropriate support for BEA's core activities is of paramount importance to the United States. Activities to develop environmental accounts should be incremental to ongoing activities and improvements and should not come at the expense of the agency's core activities. 4. Should the United States Pursue a Phased or Comprehensive Approach to Augmented National Accounts? There are two major approaches to developing nonmarket and environmental accounts: a phased approach and a comprehensive approach. BEA's proposal for the IEESA envisions a phased extension of the accounts. The work plan involves developing environmental accounts in three phases. Phase I, completed in April 1994, focused on subsoil mineral assets. The proposal for Phase II is to extend the boundary of the accounts to renewable resources such as timber, fish, and water. Phase III would extend the boundaries to environmental areas such as clear air and water and recreational assets. The new accounts were to be published in supplementary or satellite accounts and would not, in the near future, affect the core NIPA. In the initial stages, the interactions covered under BEA's plan are those that can be linked to market activities and therefore valued at market prices or at proxies for market prices. This was the rationale for dividing the work plan into the three phases—beginning with subsoil

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minerals that are entirely within the market economy and proceeding next to renewable resources, such as forests, that are substantially in the market sector. Only after completing its market and near-market accounts would BEA develop accounts for nonmarket environmental resources, such as air and water, and other important nonmarket economic activities, such as education and household work. An alternative to the proposed BEA work plan is a comprehensive approach that would involve developing a broad set of nonmarket accounts in parallel with the near-market accounts. Under this approach, BEA would endeavor to develop accounts not only for the minerals and near-market sectors, but also for nonmarket activities and products, and for environmental and nonenvironmental products and activities. The panel understands the rationale behind BEA's phased approach to extending the national economic accounts. The advantage of the phased approach is that the effort can draw on the work of other official statistical agencies and researchers and utilize the specialized competence of the agency. The panel is concerned, however, that the phased approach is focused where the light is bright but the terrain is relatively uninteresting—that the narrow focus of the phased approach will limit its usefulness. To reap the full benefit of augmented accounts, it will be necessary to develop nonmarket accounts fully and quickly. The panel does not underestimate the challenges involved in developing comprehensive accounts that include nonmarket activities. This research is in its infancy, and most of the empirical studies on this topic for the United States have been conducted by private scholars. If the United States is to make significant progress in developing a comprehensive set of nonmarket economic accounts, this work must be undertaken by the federal government under the lead of an established statistical agency such as BEA. 5.4 The panel recommends that BEA develop a comprehensive set of market and nonmarket environmental and nonenvironmental accounts. The panel understands the rationale for BEA's plan to move in phases by first improving its accounts for subsoil mineral assets and then including other market and near-market resources. These steps would provide valuable information for the nation. But the comprehensive approach recommended by the panel would provide more complete, more meaningful, and more useful economic information. 5. Should the IEESA Be Developed in the Core or Satellite Accounts? At present, BEA does not plan to redefine the core NIPA to include

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flows or investments in natural resources and the environment. The natural-resource and environmental flows would be recorded in satellite or supplemental accounts. According to BEA, the advantage of satellite accounts is that they provide expanded detail and allow for the exploration of alternative methodologies without reducing the utility of the core national accounts for macroeconomic policy and analysis. Placing environmental and nonmarket activities in a satellite account implies that these activities would not change the core estimates of gross domestic product (GDP), national income, consumption, or investment. One important reason for placing the IEESA estimates in satellite accounts is to preserve the continuity of the core NIPA, which are an essential tool for assessing the state of the economy and conducting macroeconomic stabilization policy. For example, economic research has shown a close link between movements in GDP and changes in the unemployment rate, changes in tax revenues, and the federal budget deficit. Understanding the economy requires comparing current trends and movements with historical periods in order to forecast the future. To the extent that the national product accounts become incomparable over time, the task of forecasters and policy makers becomes more difficult.3 Environmental satellite accounts serve the basic functions of a national accounting system: they provide the raw material needed for policy makers, businesses, and citizens to track important trends and determine the economic importance of changes in environmental variables. One important question is the extent to which depletion of mineral resources is reducing the nation's wealth in an imprudent manner (see Chapter 3). This kind of question can be addressed using the current IEESA mineral accounts for 1987 (as of this writing, later data are not available). In that year, the total change in proved subsoil assets (excluding revaluations) was somewhere between $–0.1 and +3.0 billion (see Bureau of Economic Analysis, 1994a). This figure can be compared with a net investment of $298 billion in "made assets" (which include structures, producer equipment, and inventories, but exclude a wide variety of intangible and other investments, such as those in research and development, software, or human capital). Under the framework of sustainable income developed in Chapter 2, these numbers suggest that the level of investment or disinvestment in subsoil assets was very small relative to the net investment in made assets or capital. The impact of net investment or disinvestment in other natural-resource and environmental assets is likely to be much larger. Two important issues arise in this context: the appropriate boundary 3   These points are forcefully argued by Okun (1971).

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for the core accounts and the state of the art in resource and environmental accounting. One of the fundamental principles of current national accounting is that national income and product occur chiefly within the boundary of the market economy. This boundary is drawn both for practical purposes of data availability and objectivity and because national output is a measure of production of market goods and services. It is also recognized by national accountants that because the core accounts are limited to market transactions, they will not necessarily reflect genuine economic welfare and may provide misleading measures of economic activity and distorted indexes for comparison over time and space (see Chapter 2). Because of the importance of the core accounts for many purposes, it is essential that comparable measures be retained. The core national accounts do not now include, nor would the panel recommend including, nonmarket activities by redrawing the boundary to incorporate, for example, all unwaged work or all natural-resource and environmental activities. A particularly valuable approach is to present a wide variety of different measures and concepts so policy makers and private-sector analysts can develop their own preferred blend of concepts and measures. The core accounts would, in this view, retain their solid anchor in market transactions, but a wide variety of alternative approaches could be presented as the data and methodologies were developed, reported, and used. 5.5 The panel recommends that the core income and product accounts continue to reflect chiefly market activity. Given the current state of knowledge and the preliminary nature of the data and methodologies involved—especially in those areas related to nonmarket activities—developing satellite or supplemental environmental and natural-resource accounts is a prudent and appropriate decision. 6. What Is the Relationship of the IEESA to the United Nations System of Environmental and Economic Accounts (SEEA)? Although BEA's proposal for the IEESA is broadly consistent with other international environmental accounting systems, it differs from the SEEA and other systems in some important respects (see Chapter 2). One important conceptual difference lies in the treatment of resource discoveries. Under the IEESA, in contrast with the SEEA, discoveries of resources, such as the proving of oil or gas reserves, are assumed to represent gross investment and therefore to increase both gross and net product measures. There are also some semantic differences in categorization: proved reserves in the IEESA are classified along with other developed assets, while they are treated as nonproduced assets in the SEEA. In

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Budgetary and Resource Implications The cost to BEA and other agencies of constructing and maintaining the IEESA will depend on the intensity and extent of the effort. The costs would be small for a minimal program of small, incremental improvements limited to a few natural-resource sectors. Estimates from BEA indicate that the costs of such a small activity, including reinstatement of the pollution abatement survey, would be approximately $1.5 million annually. It would be substantially more expensive to develop a full set of environmental and augmented accounts. In the long run such an effort would require developing a comprehensive accounting framework for exhaustible minerals and renewable resources along with a set of nonmarket service and investment accounts. Substantial incremental resources would be required both within BEA to develop the accounts and outside BEA to provide the data. Although the cost would depend on the extent to which BEA could draw on data and expertise from other agencies, it is likely that developing a full set of accounts would require incremental outlays for BEA and other agencies on the order of $10 million annually for a decade or more. While noting the importance of developing a set of environmental and augmented accounts, the panel emphasizes that this work should not be done at the expense of the timely and current production of the current core accounts, along with improvements that reflect changes in the structure of the economy. As a result of several years of budgetary stringency, BEA has been hard pressed to maintain its current program, has been forced to curtail some of its activities, and has needed to be extremely selective in its choice of new initiatives. The agenda for improvements is extensive and includes many other important issues, such as improving the measurement of service outputs, improving measurement of international transactions, and accounting for stocks of and investments in human and knowledge capital. Maintaining the vitality of the national accounts while providing innovative and valuable new information is a worthy objective for BEA in the years ahead. Continued improvements in our data infrastructure are one of the soundest investments the nation can make. Data and Research Needs for Implementing Environmental Accounts In its charge, the panel was asked to "compare methodologies with research in other countries and in non-governmental research . . . and recommend improvements and research needs." Extending the NIPA to include the economic impacts of resource and environmental flows and

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assets would require considerable upgrading of the national database in these areas. This section addresses issues related to data collection and design. Need for Interagency Cooperation on Data Collection As noted in Chapters 3 and 4, much valuable information necessary for integrated environmental and economic accounts is already collected by the federal government and is potentially available to BEA. Extensive information is available in federal agencies on physical stocks and values of economically important natural resources, including subsoil minerals, energy, timber, commercial fisheries, and land. BEA's preliminary work on the Phase I accounts made use of existing data on the physical quantities and market values of such natural-resource assets. However, much of the data necessary for developing environmental accounts is currently unavailable or insufficient. One important step, therefore, would be to undertake a focused effort to increase and improve the data necessary for this work. Without significant improvement in this area, development of a full set of empirically based environmental accounts would be impossible. Fortunately, much of the information needed to construct and maintain environmental accounts would also be useful to other federal agencies with resource management responsibilities. This is particularly the case for natural assets under federal stewardship. For example, better information on the value of minerals on federal lands and the net value of minerals extracted from federal lands would be useful in determining appropriate royalty rates and patenting policies for resources not allocated through competitive auctions. The same information would be useful to BEA in constructing environmental accounts for exhaustible natural resources. In the case of renewable resources, better information on the stumpage value of timber in national forests would be useful not only for accounting purposes, but also for better management of these forests and for the difficult decisions required on the balance of different uses, including timber harvesting, wilderness preservation, watershed management, and recreation. Better information on fish stocks, depletion of fish stocks, and resource values net of extraction costs would be valuable to the National Marine Fisheries Service and to the Fisheries Management Councils and would also support U.S. negotiations in international fishing treaties. These agencies have been hamstrung in their efforts to prevent overfishing by a lack of reliable information on changes in stocks of commercial fisheries and on the dissipation of fisheries rents. In the case of environmental resources such as air and water quality,

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better information on the economic value of marginal changes in air and water quality, which would be essential for constructing a comprehensive set of environmental accounts, would also be essential for sound benefit-cost analyses that the U.S. Environmental Protection Agency (EPA) is required to undertake in regulatory decision making. One of the most serious weaknesses in the U.S. environmental database is the lack of comprehensive and reliable data on actual human exposures to major pollutants. Better information on physical emissions trends, human exposures, and the economic impacts and damages due to air and water pollution would be valuable for expanded accounting measures of productivity. In summary, there are strong synergies between BEA's data needs for implementing its environmental accounts and other agencies' data needs for resource and environmental management. Consequently, there would be great value in a cooperative and coordinated approach among federal agencies to the collection and management of improved natural-resource and environmental data. Definitions and coverage of existing surveys could be modified at relatively small cost to meet the needs of the environmental accounts while also providing better data for policy making. Raw data could be formatted and processed in more than one way to serve multiple purposes. Useful data collection efforts that might be found expendable by one agency operating under tight budgetary constraints might be continued under cost-sharing agreements among several agencies. Existing statistical coordinating and advisory bodies within the federal government, including the Office of Management and Budget, could play a useful role in coordinating data collection efforts useful for both environmental accounting and other important federal purposes. In addition to coordination of data collection and management efforts, there is also a need to coordinate standards for accounting and measurement. Even though the general conceptual basis for environmental accounting is reasonably well established in theory, many issues arise in constructing the empirical counterparts to general concepts. Estimation methods that are equivalent in theory will typically yield different empirical results when used with actual data, and choices must be made among alternative valuation methods and data sources. Work on the valuation of natural resources under federal control is ongoing under the auspices of the Federal Accounting Standards Advisory Board. Close cooperation among BEA, other federal statistical agencies, and private researchers would be important for providing estimates of quantities and values that are appropriate for national-income accounting. 5.9 Extending the national accounts to include a full set of natural-resource and environmental impacts would require a major, focused

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effort to improve the databases on quantities and values of key natural resources and environmental variables. Without significant improvement, it would not be possible to develop a full and reliable set of empirically based environmental accounts. Much of the information needed to construct and maintain environmental accounts would be highly useful to other federal agencies, particularly for natural assets under federal stewardship and for environmental activities for which the federal government has responsibility to undertake benefit-cost analysis. A cooperative and coordinated approach among analytic teams of researchers from different federal agencies and the private sector to collect, analyze, and manage improved natural-resource and environmental data would be valuable not only for developing natural-resource and environmental accounts, but also for promoting better monitoring, assessment, and policy making in these areas. Data and Research Needs with Respect to Exhaustible Resources BEA's preliminary implementation of its environmental accounts resulted in estimates of accounts for subsoil minerals, including fuels, metals, and nonmetallic minerals. In its 1994 article on minerals accounting (1994b), BEA addressed a number of data and implementation issues. Information on production, production costs, reserves, and reserve changes is less complete and accessible for most nonfuel minerals than for fossil fuels. Standardization of classifications among data collection agencies could improve the information base. All the valuation methods attempted by BEA in Phase I—reviewed in Chapter 3 of this report—are approximations to ideal measures of the market value of subsoil resource stocks and flows. These approximations are required because the information needed to implement ideal measures is unavailable. Implementing ideal measures of resource values based on the discounted present value of returns generated over the life of the resource would require projections of future prices, quantities, and discount rates. However, better approximations could be obtained with additional research and information. The most important topics include the following. The heterogeneity of resources. Resources actually utilized, for which market data are available, tend to have the highest quality and lowest cost of those currently available. The unit value of additions to reserves may differ substantially from the unit value of extracted or harvested reserves. This is true both for exhaustible resources and for renewable resources, such as timber. Valuing additions to reserves or the entire body of reserves at the same price as resources currently extracted or harvested may seriously bias estimates of the value of the stock.

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Information is potentially available on the distribution of many deposits of ores and mineral fuels by grade, depth, and other relevant characteristics. Similarly, information is available about the characteristics of standing timber stock by species, grade, accessibility, and age. Fish biologists have information about the size of the recruitment class added to a fish population in a given year. Such information could be used to refine the estimates of stock values and of changes in the stock over time, and could provide substantially more accurate estimates of the value of additions and depletions to the stock of resource assets. Unproved reserves and resources. Under current approaches, only the value of proven reserves is usually included in the product and asset accounts. Proven reserves are, by definition, those resources which are known with reasonable certainty to be economical to produce at current prices and using currently available technology. Because unproven or speculative resources may be produced in the future as prices rise and technologies improve or as potential reserves are developed, they may have a market value. Although BEA has indicated plans to produce such estimates in the future, they are not included in current accounts. Further information on the value of unproven resources could be obtained from such sources as bids on offshore oil and gas leases. Some mineral and timber resources, though known, are not commercially available because they occur on federal or state lands that have protected status. These resources also have an option value because their legal status may change. For example, the federal government recently sold the Elk Hill petroleum reserve. Information on the extent of such resources, if made available for production purposes, could be obtained from federal land and resource management agencies. Value of associated capital. Mineral reserves usually consist of mineral assets and associated physical capital constructed to exploit the reserves. It is necessary to estimate the value of the associated tangible capital in order to estimate the value of the natural-resource stock or flow (see Chapter 3), Otherwise, the estimated resource values may be substantially overstated. Though BEA has attempted to make such provisions, further information gathering is needed to refine these estimates. For example, Chapter 3 examines techniques for improving the simplest Hotelling valuation approach by incorporating a measure of the value of the physical capital constraint on production. Consequently, more empirical information is needed on the extent to which production of oil, gas, and nonfuel minerals is likely to be limited over short time periods by physical capital constraints. Such research would allow a better estimate of the value of associated capital. Liabilities associated with resource extraction. For institutional reasons, mining historically has not provided private firms with adequate

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incentives to forestall or remedy many environmental effects. Consequently, there are thousands of active and inactive mine sites responsible for environmental harm to surrounding properties through leaching, subsidence, or visual impairment. Such sites could be termed natural-resource liabilities. Currently, there is no proper accounting either for the stock of such liabilities or for the change in their value. Data are available from federal oversight and regulatory agencies to account for such liabilities, and may also be obtainable from mineral leases that specify restoration once mining operations have been completed. Regional disaggregation of resource accounts. BEA's preliminary estimates indicated that the value of exhaustible resource stock changes does not constitute a large fraction of national net capital formation. Nonetheless, such changes do represent substantially larger fractions of net investment in particular regions or individual states whose economies are relatively resource-dependent. For example, extractive and other resource-based industries are economically significant in Alaska, the mountain states, the Northwest, and parts of the South and Northeast. Within a framework of supplemental accounts, it would be useful to present regionally disaggregated resource accounts. Doing so could create additional data requirements. Since the underlying source data on production and stocks are generally collected for states and counties, the main requirement is that the locational tag not be lost in the process of data aggregation. In improving BEA's accounts for subsoil assets, further analysis is needed to assess different valuation techniques. Preliminary assessments indicate that the standard Hotelling valuation approach overestimates resource values, and this finding should be incorporated in valuation approaches. Further work is necessary to determine the importance of heterogeneity of reserves, the value of unproven and speculative assets, the value of associated capital, the liabilities associated with resource extraction, and the regional impacts of activities associated with subsoil assets. Where the costs are reasonable, BEA should develop and report regional data on important natural-resource and environmental activities, such as those for subsoil assets. The recommendations of the panel in this area are contained in Chapter 3. See particularly recommendations 3.2 through 3.7. Data and Research Needs for Accounting for Renewable Resources Asset values. BEA's plans for developing the environmental accounts include making estimates of developed natural assets such as timber in managed forests, cattle, vineyards, orchards, cultivated fish stocks, and developed land. In a later stage, BEA would account for uncultivated

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biological resources such as wild fish, timber and other plants in unmanaged forests, and other uncultivated biological resources. The construction of accounts for agricultural, horticultural, and animal husbandry assets poses no major data issues, and the U.S. Department of Agriculture, together with the U.S. Bureau of the Census, has a comparatively full set of information on these issues. Similarly, data sources, though of varying accuracy, are available from which to estimate the market value of developed land. Accounting for renewable resources such as forests encounters some of the same information issues and data gaps as does accounting for exhaustible resources. Managed forests other than plantations contain trees of heterogeneous ages, species, and other characteristics. Harvested trees will generally differ in unit value from the unharvested stock and from additions to that stock. Data on the heterogeneity of timber stocks are particularly important because harvesting is likely to be limited to the more valuable stocks, and therefore stumpage price estimates derived from such commercial operations cannot be reliably extrapolated to other unexploited stocks. Though the national forests contribute a small share of total harvested timber, there are particular problems in accounting for wood extracted from these forests. Though standing timber is typically sold through auction bids, sales prices will not represent the market stumpage value of the timber for those sales that have only a single bidder. In such sales, the winning bid usually corresponds to the Forest Services's administratively determined minimum acceptable bid. Bids are also influenced by cost considerations. Logging contractors are required to operate under conditions imposed to protect other multiple-use environmental values, such as water quality, habitat protection, and recreational and aesthetic values. These conditions may increase logging costs and therefore reduce the amounts potential contractors are willing to bid for logging rights. Offsetting these upward pressures on costs in the national forests, the government bears some logging costs, notably those of road construction, which are financed out of road credits. Research will be necessary to determine whether transaction data based on bids for logging rights in national forests are an accurate source of information on stumpage values, or whether they would require some adjustment to be useful in the environmental accounts. With respect to timber harvested on private lands, difficulties arise in allocating joint production costs in industrial forestry operations carried out by integrated pulp and paper or forest product companies. A substantial fraction of total timber harvested originates on lands owned and operated by such companies. In addition to problems of joint cost allocation, there are also problems of establishing or inferring prices for logs

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that are not bought or sold but processed by integrated companies into final products. Further issues arise with respect to valuation of timberland, as opposed to the standing stock of trees. In its initial effort, BEA assumed that timberland, on average, is worth as much as agricultural land. BEA reasoned that if not worth at least that much, timberland would be converted to agriculture, which may be its next-best use. However, the opposite might also hold true—that timberland is kept in forest because the land is not worth converting to agriculture. Better regional-specific information on the capabilities and market value of forested land would be helpful in improving the estimates. Measurement of service flows. The main challenge for research and data collection arises from the need in a comprehensive set of environmental accounts to estimate the environmental service flows provided by forests, freshwater, and other renewable resources. Because use patterns have historically been dominated by commodity production for the marketplace (such as agricultural production using land and timber production from forests), there is much more data available on commodity production values than on environmental service values. Nonetheless, economic research indicates that many renewable resources, especially those in the public domain, are today more valuable as sources of environmental service flows than as sources of marketed commodities. Ignoring service values would therefore substantially distort asset and production accounts. There are many useful data sets on the use of publicly held renewable resources for recreational purposes. For example, the government collects data on the number of visitor-days for recreational purposes to national forests, public beaches, and other protected areas. Economic research has estimated service values and related those values to various qualitative aspects of the services, such as congestion, water and air quality, and visual characteristics. This research is based on methodologies developed by environmental economists. Some such methodologies derive estimates of values from observations of market or behavioral decisions, such as travel costs incurred to participate in recreational activities. Such information can be used to estimate the value of current service flows provided by renewable resources and the contribution of these service flows to the underlying asset values. Problems can arise in the use of current estimates. Care must be taken to ensure that the values are marginal or incremental values, rather than total or consumer-surplus values. Many studies include consumer surplus and are therefore not comparable to the price and value approach used in the current national accounts. Moreover, the establishment of either values or quantitative estimates of environmental service flows related to such ecological functions as wildlife habitat, nutrient recycling,

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carbon sinks or sequestering, biodiversity, and hydrological regulation is still highly speculative. Inclusion of such estimates in the national accounts is questionable today and might be postponed until data and methodologies in this area are improved. More research is needed on the effect of stock changes on the value of these service flows because the relationship is complex and current information may be inaccurate. For example, a reduction in standing volume of timber may change water outflows from a forest, increase habitat for some animals and decrease habitat for others, and increase some kinds of recreational services while decreasing others. Storage and diversion of waterways for irrigation purposes may likewise provide habitat for some aquatic species and destroy it for others, and increase some recreational uses but eliminate others. Many of the same issues arise in accounting for the market-related functions of renewable resources and subsoil assets. Much work already exists on valuation of forests and timber, but further research on valuation is necessary to determine the accuracy of the Hotelling approach. The major challenge in estimating both asset values and service flows lies in determining appropriate values for nonmarket aspects, which are particularly important for forests. Recommendations for forests are in Chapter 4 (see particularly recommendations 4.5, 4.8, and 4.9). Accounting for Changes in Air and Water Quality Developing improved accounts for environmental assets such as air and water quality or nonmarket services of natural-resource and environmental assets is an important goal of augmented accounting. Accomplishing this goal involves both measurement of the costs of pollution abatement and estimates of the value of the market and nonmarket services provided by these assets. One important initial step undertaken by BEA was the construction of a set of estimates of pollution abatement and control activities. This effort has unfortunately been discontinued because of budget cuts imposed on BEA. These estimates are an important aspect of any economic assessment of the environment. The development of accounts for changes in air and water quantity was postponed to Phase III of the IEESA effort, as was accounting for uncultivated biological resources such as wild fish and undeveloped land. Though ambient environmental quality represents an important dimension of current consumption and from a conceptual point of view belongs within an expanded set of environmental accounts, data needed to implement this approach are currently unavailable except in a small number of cases. Data on air and water pollution illustrate the difficulties. Although

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EPA often conducts benefit-cost analyses to support regulatory decision making, the resulting estimates of the economic value of marginal changes in environmental quality are typically limited to a limited class of pollutants, pollution sources, and geographical areas. They cannot be readily extended to the more comprehensive national estimates needed for a set of augmented accounts. Moreover, they usually examine the incremental costs and benefits of a regulation and seldom calculate the total damages or changes in damages from a historical or normative baseline. Finally, for the most past, the valuations of benefits contained in these studies are not derived from market transactions or behaviorally derived values. Unless EPA and other agencies undertake or underwrite a substantial effort to improve the data in this area, the lack of comprehensive information on the value of nonmarketed environmental goods and services is likely to constrain the development of a full set of environmental accounts. The nub of the difficulty in constructing a set of environmentally adjusted national accounts lies in estimating the consumption services of environmental assets. Deriving such estimates through the conceptually correct ''damages borne" approach—which measures the actual damages or impacts of changes in environmental flows—would require improved data on ambient air and water quality, which vary temporally and spatially, and on the profile of exposures of humans and other organisms to pollution. Perhaps the most important lacuna is data on actual human exposures to air pollution, which are virtually absent from the U.S. national data system. Economic damage assessments—whether based on epidemiologically estimated dose-response relationships or more directly on hedonic property, wage, or travel-cost studies—do not now constitute an adequate empirical base on which to construct environmental accounts. Estimates are sensitive to specification and data and tend to be time- and location-specific. Moreover, econometric estimates based on compensating and equivalent variations often give substantially different results. Additional research on the valuation of pollution damages is needed, with special emphasis on the value of marginal changes in environmental quality. Research on so-called "benefits transfer" techniques, which allow damage estimates to be adapted to other populations and pollution concentrations, is also needed. For these reasons, implementing Phase III of BEA's proposal would require a considerable research component. Finally, two recommendations presented in Chapter 4 are worth reiterating here. First, BEA's annual survey of pollution control and abatement expenditures should be reestablished (see recommendation 4.7). Second, the nation needs improved measures of physical indicators for many environmental variables, particularly those involving human expo-

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sures. In the designing of environmental indicators, policy issues should dictate the choice of variables and the focus of the research. Measures should focus on human health and on social, economic, and ecosystem effects, rather than simply on pollutant concentrations or similar intermediate variables (see recommendation 4.3). Frequency The panel considered the issue of the frequency of estimation and publication of natural-resource and environmental accounts. Because the underlying physical activities generally take place at a slow pace, particularly relative to business cycles, it is not sensible to aim for reporting in the satellite accounts more frequently than on an annual basis. Annual reporting is recommended for those activities—particularly subsoil assets and forests—for which annual data are readily available. For other measures, including input-output analysis, measures of comprehensive or sustainable income, and similarly complex constructions, quinquennial reports may be a reasonable goal. Frequent analysis and reporting are not necessary given the source data, costs, and temporal evolution of assets and activities that are being measured. Neither the data nor the likely uses of such accounts would suggest the need for monthly or quarterly data, particularly given the problems created by the short-run volatility of mineral commodity prices. 5.10 The panel recommends regular periodic accounting in the natural-resource, environmental, and other augmented accounts. The accounts for subsoil assets and forests could be developed, calculated, and reported on an annual basis. For other measures, less frequent accounts, perhaps quinquennial, would be appropriate and cost-effective.