2
The National Income and Product Accounts: History and Application to the Environment

Nature's Numbers

Natural and social scientists concerned about natural resources and the environment have endeavored to take the measure of nature. Measures used for this purpose range from those used to monitor the state of major environmental indicators, such as air and water quality, to analytical measures of major environmental aggregates. For the most part, however, measures of the economic contribution of natural resources and the environment have lagged behind physical measures. The slow development of economic measures is due to two major factors. First, economic accounts generally record and measure activities that pass through the marketplace, while most of the activities that raise environmental concerns—from air pollution to appreciation of pristine wildernesses—take place outside the market. Second, the paucity of data and difficulties of valuation for most environmentally related activities make constructing economic measures much more difficult than is the case for market-related activities. The end result is that most nations produce detailed national economic accounts accompanied by vast quantities of useful data for market-related activities and little or no comparable data for nonmarket environmental activities.

The intuitive idea behind the desire to broaden the U.S. national accounts is straightforward. Natural resources such as petroleum, minerals, clean water, and fertile soils are assets of the economy in much the same way as are computers, homes, and trucks. An important part of the



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2 The National Income and Product Accounts: History and Application to the Environment Nature's Numbers Natural and social scientists concerned about natural resources and the environment have endeavored to take the measure of nature. Measures used for this purpose range from those used to monitor the state of major environmental indicators, such as air and water quality, to analytical measures of major environmental aggregates. For the most part, however, measures of the economic contribution of natural resources and the environment have lagged behind physical measures. The slow development of economic measures is due to two major factors. First, economic accounts generally record and measure activities that pass through the marketplace, while most of the activities that raise environmental concerns—from air pollution to appreciation of pristine wildernesses—take place outside the market. Second, the paucity of data and difficulties of valuation for most environmentally related activities make constructing economic measures much more difficult than is the case for market-related activities. The end result is that most nations produce detailed national economic accounts accompanied by vast quantities of useful data for market-related activities and little or no comparable data for nonmarket environmental activities. The intuitive idea behind the desire to broaden the U.S. national accounts is straightforward. Natural resources such as petroleum, minerals, clean water, and fertile soils are assets of the economy in much the same way as are computers, homes, and trucks. An important part of the

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economic picture is therefore missing if natural assets are omitted in creating the national balance sheet. Likewise, consuming stocks of valuable subsoil assets such as fossil fuels or water or cutting first-growth forests is just as much a drawdown on the national wealth as is consuming aboveground stocks of wheat, cutting commercially managed forests, or driving a truck. History of Augmented Accounting General Developments From the perspective of environmental accounting, the key point to recognize is that gross domestic product (GDP) is conceptually defined to include only the final output of marketed goods and services, that is, goods and services that are bought and sold in market transactions. This point is clearly stated in a comprehensive discussion of the National Income and Product Accounts (NIPA): "... the basic criterion used for distinguishing an activity as economic production is whether it is reflected in the sales and purchase transactions of the market economy" (U.S. Department of Commerce, 1954). There are, however, important exceptions to this basing of the NIPA on market transactions. One is the exclusion of illegal activities such as drugs, prostitution, and illegal gambling; thus GDP will rise as gambling moves into the legal market sector. In addition, there are imputations for near-market services that are not recorded in market transactions. For example, there is an imputation for the services of owner-occupied housing so that these services can be included in output and income as are the rent and output associated with rental housing. There is also an imputation for the fuel and food produced on farms and consumed by the farmers themselves. A further large imputation is made for banking and other financial services furnished by financial businesses below cost in lieu of interest payments. The key issue involved in environmental and other augmented accounts is whether to broaden the above boundaries and if so, how and how far. It has long been recognized that drawing the line at the limits of the market distorts the value of the NIPA as a measure of economic activities and well-being (see also Chapter 1). There is a vast and changing amount of productive nonmarket activity that produces goods and services quite similar to those produced in the marketplace. Commercial laundry services are reckoned as part of GDP, while parents' laundry services are not; the value of downhill skiing at a ski area is captured by GDP, while the value of cross-country skiing in a national park is not. At the same time, while recognizing the importance of considering

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alternative measures, it is essential to retain the conventional market-based accounts as a central component of our national accounts. These core accounts are of great importance for purposes of historical and international comparison and will continue to be a critical indicator for economic policy making. The objective of augmented accounting is not to replace the core accounts with a preferred new bottom line; rather, the emphasis is on developing alternative approaches and measures that can illuminate the diverse dimensions of economic activity. Work on augmented accounting by official statistical agencies, as well as by individual scholars, has provided estimates for a wide variety of nonmarket activities for experimental augmented national accounts (see Eisner, 1988, for a comprehensive review of augmented accounting). Beyond the environmental arena, which is reviewed in the next section, significant examples of work to extend the accounts include the following areas: The value of home production and unpaid work The value of the services of consumer durables (similar to the imputation of services of owner-occupied housing) The value of research-and-development capital The value of leisure time The value of informal and home education This work on extending the accounts is motivated by the idea that expanding the boundaries of the accounts would provide a better estimate of the size, distribution, and growth of economic activity and economic welfare than that offered by the current accounts.1 In revising and extending the U.S. NIPA, the Bureau of Economic Analysis (BEA) is following guidelines suggested by the internationally formulated and recommended U.N. System of National Accounts (SNA) (Parker, 1996 and 1991). These efforts have entailed both modifications in core measures, such as the introduction of separate current and capital accounts for government, and the development of satellite accounts, such as for research and development. Satellite accounts (sometimes referred to as supplemental accounts) expand the analytical capacity of the national accounts without overburdening them or interfering with their general orientation. Because they supplement rather than replace the core accounts, they can serve as a laboratory for experimentation and provide a means for applying alternative approaches and new methodologies. 1   Many of these examples are reviewed in Eisner (1988).

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The guiding principle in developing augmented accounts is to measure as much economic activity as is feasible, regardless of whether that activity is of a market or nonmarket nature. The goal is to achieve a better measure of final output—of what consumers in the United States currently enjoy in the way of goods and services, and of the accumulation of capital, of all kinds, that will permit the future production of goods and services. In terms of current consumption, augmented output includes not merely what consumers buy in stores, but also what they produce for themselves at home; the government services they ''buy" with their taxes; and the flow of services that are produced by environmental capital such as forests, national parks, and ocean fisheries. The need to include nonmarket components arises because of the tradeoffs between market and nonmarket activity. For example, parents produce more in the market when they go to work, but they also have less time at home for child care and domestic services. Likewise, the resources used to provide government services that add to real consumption may reduce the quantity of services provided by businesses. In the environmental area, resources devoted to removing lead from gasoline and paint will lower conventionally measured consumption, but will raise the nation's human capital by protecting children from brain damage and other debilitating illnesses. Similar issues arise in the measurement of national saving and investment. Conventional NIPA saving and investment measures include only tangible investments in plant, equipment, and inventories. This conventional picture omits the much larger intangible and human investments in education, training, research and development, health, and the environment. A complete set of accounts would entail full integration of comprehensive investment flows with comprehensive capital or wealth accounts. These accounts would then relate not only to current production of goods, but also to changes in the value of human capital; to the accumulation of knowledge and technical advances; and to the improvement or deterioration of the basic environmental capital of land, water, and air. Development of a complete set of capital accounts would thus give the nation a much more complete picture of how well the current generation is performing in its role as trustees of the nation's tangible, human, and natural resources. Comprehensive accounts and environmental accounting provide information that can help governments set sound economic and social policies and aid the private sector in making productive investments. An important example is use of pollution abatement costs to estimate the impacts of regulation on productivity and output growth. Studies by Denison (1979) and by Jorgenson and Wilcoxen (1990) have provided valuable information on the relative importance of regulation, pollution

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control expenditures, and other factors in the slowdown of productivity growth in the United States after 1973. In addition, these data have been crucial inputs to studies of the cost of air pollution regulation and the benefits and costs of controlling air pollution conducted by the U.S. Environmental Protection Agency. Two major issues arise in the design of augmented accounts. The first is where to draw the line when extending the accounts beyond the boundary of market transactions. The dilemma is similar to that faced by the little boy who said, "I know how to spell banana, but I don't know where to stop." Should the line be drawn at near-market activities—for example, home-cooked hamburgers, depletion of oil and timber resources, fish caught and consumed by anglers, and services of consumer capital such as automobiles and washing machines? Or should the accounts extend to all private goods, such as educational investments and the value of visits to Yellowstone National Park? Should the accounts attempt to measure the value of leisure time? Should they extend to include public goods such as the value of clean air and clear water? Should they include international concerns such as the damages from ozone depletion and global warming? These thorny questions are taken up later in this report, but we note here that they are pervasive in the design of augmented accounts. The second major issue is how to measure nonmarket activities. Measurement involves collecting data that will support estimates of both quantities and prices. While data on market activities are often costly to collect, for the most part the elemental data exist in the form of individual transactions in which someone buys a banana, a computer, or a haircut—transactions that are generally recorded. Nonmarket activities pose difficulties because the physical activities involved are generally not recorded, and there are no objective records of the valuations. An example of the difficulty is a consumption service such as swimming in the Atlantic Ocean. No one records how many times Americans actually swim in the Atlantic Ocean in a given year. More difficult is the valuation of swimming: since swimming is generally free, except in congested areas, we do not know how to value the swims. There are numerous techniques available for estimating both the quantity and value of nonmarket activities such as swimming, but they almost always require gathering additional data and involve complex imputations of value where no market data are available. We must not, however, forsake what is relevant and important merely because it presents new problems and difficulties. The economic light is brightest under the lamppost of the market, but neither drunks nor statisticians should confine their search there. In extending the accounts, we must endeavor to find dimly lit information outside our old boundaries of search, particularly when the activities are of great value to the nation.

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Developments at the Bureau of Economic Analysis Over the last decade, BEA has taken a number of important steps in extending the core economic accounts and developing satellite and supplemental accounts (BEA, 1995a). Among the most important developments in the core accounts are the following: Improved measures of price and output. BEA has pioneered the use of improved measures of price and output, including the use of chain-weighted price and output indexes. These measures allow more accurate tracking of inflation and output than did earlier fixed-weight measures. This work has demonstrated that these state-of-the-art concepts can be implemented routinely in national statistical measures. Improved investment accounts. BEA has moved to broaden the U.S. investment accounts in line with international standards by introducing estimates of government investment and capital and improving the estimates of depreciation and capital stocks. Improved international accounts. Recognizing the growing importance of services in the nation's economy, BEA has incorporated new information on international trade in services and revised estimates of foreign direct investment. In its efforts to improve the national economic accounts, BEA has been proceeding in a prudent and conservative fashion, employing proven and consistent techniques. In its core national accounts, BEA employs the concept of Hicksian income (see Appendix A). Such production-based measures of income and output are useful for delineating market activity and should continue to form the basis of the core national accounts. Market-based concepts are inadequate, however, for tracking the entire range of economic activity, market and nonmarket. The purposes of augmented accounting are to provide more comprehensive measures of output, saving, and investment; to ensure that the accounts treat economic activity in a consistent way when the boundaries between market and nonmarket activities change; and to provide information on the interaction between the economy and the environment so that natural and environmental resources can be more effectively managed and regulated. Importance of Environmental and Natural-Resource Accounting Environmental and natural-resource accounting has emerged over the last three decades in response to increasing awareness of the interac-

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tion between the natural environment and economic activity. Growing concerns about resource scarcity were reinforced by the dramatic increases in energy and mineral prices of the 1970s. Many began to worry that the nation was rapidly depleting its precious stocks of subsoil assets. Further awareness resulted from documentation of the economic and social costs of environmental degradation and pollution in terms of human health and property values, reinforced by pictures of rivers and lakes on fire and serious oil spills. A set of well-designed environmental accounts could overcome the shortcomings of the current market-based accounts. Indeed, the construction of environmental accounts is one element of the more general task of developing a set of comprehensive economic accounts that includes both market and nonmarket economic activity. This section reviews the primary shortcomings of the current accounts and explains why a well-constructed set of comprehensive accounts would have significant economic value to the nation. Deficiencies of Current National Accounts Efforts to develop alternative accounting approaches to supplement the standard market accounts with measures of changes in consumption and investment in natural resources and the environment have been undertaken in response to three perceived deficiencies in the way the conventional accounts treat natural resources and the environment. First, as an indicator of economic well-being, the accounts sometimes behave perversely with respect to environmental degradation and changing stocks of natural resources. For example, cutting down the nation's dwindling redwood forests increases GDP, yet no account is taken of the loss of this precious asset because the nation's forests have not been included in the asset accounts. For similar reasons, when fishing activities increase the harvest of cod or halibut, the national accounts record the increased production and consumption, but omit the decline in breeding stocks and the costs imposed on future producers and consumers. And pollution abatement expenditures increase measured output—even when such expenditures serve only to offset environmental deterioration, and there is no net increase in current or future consumption. In these and many other examples, changes in production do not reflect genuine changes in economic well-being and may even result in economic harm or cost in the future. Second, the standard national accounts are inconsistent in their treatment of different forms of wealth. For example, the NIPA include a full set of accounts of gross investment, net investment, depreciation, and the capital stock for produced, tangible producer capital. In contrast, natural

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capital—such as oil and gas deposits, forests, soils, and underground aquifers—is largely omitted from the accounts. When a commercially grown tree is cut, the production cost of the tree is counted as a cost of production, but when a first-growth national forest is clear-cut, there is no parallel subtraction. As a factory ages, this is counted as a depreciation charge, but the accounts are not charged when an oil deposit is exhausted. Likewise, the national accounts nowhere reflect the occurrence of widespread deterioration or improvement in the quality of environmental assets such as air and water. The distinction between gross and net investment for reproducible capital is justified on the grounds that those investments which simply replace depreciated stock add nothing to economic well-being and that failure to subtract depreciation would yield income measures that might be unsustainable in the long run. The logic of this argument is equally applicable to environmental and natural capital. The third and perhaps most important deficiency of the conventional national accounts is that they give a very incomplete picture of the full scope of economic activity. By focusing only on marketed outputs and factors of production, the conventional accounts neglect a large number of economically significant inputs and outputs that are not bought and sold in markets. In the environmental area, these nonmarketed inputs and outputs often include the free goods and services provided by environmental assets such as air, water, forests, and complex ecosystems. Many of these assets—such as recreational sites in Yellowstone Park, stocks of underground water and flows of river water in the Southwest, and public parks in New York City—are limited or fixed in supply. Thus they have economic scarcity value even though they may lack market prices. Because the conventional accounts omit such economically valuable but nonmarketed goods and services, they overstate the role of market inputs and outputs in economic welfare. They also fail to provide business, citizens, and policy makers with the full and accurate assessment of the state of economic activity that is needed for economic policy and rational environmental management. Finally, it should be emphasized that the current NIPA do not focus on a conceptually appropriate definition of market national income and output. The most appropriate measure of national output in the core accounts today is real net national product, which measures the total net output and income accruing to residents of the United States, corrected for inflation. This differs from the measure currently emphasized, real GDP, in two ways. First, GDP includes depreciation or capital consumption, which exaggerates sustainable income by including in national income a sum that cannot sustainably be consumed. Traditionally, output measures have emphasized gross rather than net product because depreciation is difficult to measure accurately. Second, GDP excludes the net

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factor earnings abroad of domestic residents, which is included in national product. Inclusion of net factor earnings abroad is desirable if output is designed to measure the sustainable consumption of the nation. The recent switch in emphasis from national to domestic product occurred because domestic product is more closely related to domestic output and employment. While the emphasis on GDP rather than net national product is understandable, the panel emphasizes that the latter is conceptually preferable as a measure of sustainable income. Value of a Comprehensive Set of Accounts: Scorekeeping and Management Economic accounting—whether it be business accounting or the accounting of a nation's economic activity—traditionally serves two major functions: it offers a way to track the economic performance of a business or a nation, and it provides an organized body of economic data that enhances the ability of an organization or a nation to manage its economic affairs. The principal reason for growing interest in natural-resource and environmental accounting is the belief that improved accounting for the contribution of natural capital will enhance the ability of the conventional accounts to serve both of these functions. The NIPA are the major way nations keep score on overall, regional, or sectoral economic performance, past and present. The core accounts include production measures such as gross national product (GNP) and GDP, along with data measuring market incomes and a broad array of sectoral data. These core accounts are widely used to gauge a nation's economic performance over time and to compare economic performance among nations; they are an essential tool for assessing the state of the economy and formulating 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 in national output with those of various historical periods in order to forecast the future. This scorekeeping function of the national accounts is widely accepted in spite of many deficiencies in the measures of prices and outputs and the numerous interpretative problems introduced because the core accounts are limited to market transactions (see Hicks, 1940; see also Kuznets, 1948a, 1948b). As discussed above, measures of augmented national income and product endeavor to extend the purview of the economic accounts by including a broader set of consumption, investment, and income measures. These augmented accounts give a more balanced view of the trends

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of overall economic activity and provide more accurate estimates of trends in income, saving, and investment. More comprehensive systems that account for negative outputs such as pollution and positive outputs such as outdoor recreation will yield more meaningful indicators of economic performance. One valuable contribution of well-designed comprehensive measures is that they can eliminate anomalies in the national accounts. For example, according to conventional measures of economic performance, oil spills and earthquakes often raise GDP and appear to make the nation better off. Such anomalies would be redressed by appropriate accounting measures. Similarly, improved measures would correct the anomaly that a nation with abundant natural parks and recreational opportunities provided freely to its citizens appears to be worse off than a nation that provides recreation only through commercial theme parks. A final set of scorekeeping measures relates to what is called "sustainable income." These measures address the question of whether the nation is setting aside sufficient tangible and intangible capital and new technological knowledge to ensure that future generations will have an adequate standard of living. Sustainable national income is defined as the maximum amount a nation can consume while ensuring that future generations will have living standards at least as high as those of the current generation. It turns out that ideal measures of sustainable income are closely related to current national income and product measures. Techniques for measuring sustainable income are discussed later in this section and in Appendix A. The second function of economic accounting—providing data needed to manage economic activities—requires gathering a systematic record of all the inputs and outputs that characterize an economic system. The management function of accounts and budgets is widely used by both businesses and governments. While scorekeeping indices may tell a business whether it is profitable, details of accounts and budgets are necessary to help the business make better decisions and improve its profitability. Similarly, while government budgets are valuable summary indicators of the overall importance of the government sector in the economy and of government's net contribution to national saving, the most important function of the budgetary accounts is to help Congress and the executive branch direct the day-to-day operations of the federal government and the allocation of federal resources. The detailed information embodied in the national economic accounts serves a similar function in the management of national economic policy. Even in countries such as the United States that have strong laissez-faire traditions, the economic accounts are an essential input to major economic policy and forecasting models that influence fiscal and monetary

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policy. At a more detailed level, the data help businesses track their own sectors and forecast their sales and profits, and are useful for a wide variety of economic activities. Unfortunately, the conventional economic accounts are sometimes deficient for management purposes because of their omission of those inputs and outputs that are not traded in the marketplace. Resource and environmental accounting expands the list of inputs and outputs so that policy makers are in a much better position to develop and analyze policies, especially those that involve interactions between the natural environment and the market economy. Economic accounts expanded to include resource and environmental activity are especially useful for the analysis of major environmental policies and programs that may affect large segments of the economy, such as those related to water allocation or global warming, or for the analysis of nonenvironmental programs that may have substantial environmental consequences, such as interstate highway programs. Without a comprehensive environmental and nonmarket accounting framework, each policy analysis requires data collection de novo. As a result, analyses of environmental programs today are extremely expensive and inefficient. A system of resource and environmental accounts linked with the conventional economic accounts can provide the inputs for a wide variety of policy analyses at relatively low incremental cost. The remainder of this section describes in detail the primary benefits of a comprehensive set of accounts. Comprehensive Accounts Give a Complete Picture of Economic Activity At the most general level, comprehensive economic accounts provide a complete reckoning of economic activity, whether it takes place inside or outside the boundary of the marketplace. As suggested above, economic decision makers need to understand more than the conditions of the marketplace if they are to make sound decisions. Business clearly need and want to know about basic economic conditions in the world, the nation, their region, and their industry. Without such information, firms are flying blind. They run the risk of continuing unsustainable programs to the point of serious decline or even bankruptcy. States and localities similarly require comprehensive accounts of economic activity. Such comprehensive accounts need to include natural-resource and environmental accounting. A firm will pause, for example, before building a plant for which a fuel that is running into short supply would be required or locating in a region whose water supplies are severely limited. Companies may want to build in areas that have many amenities and high environ-

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counts as satellite accounts. Environmental accounts would thereby serve as a tool for expanding the analytical capacities of the national accounts without changing the core accounts, thus complementing rather than substituting for the traditional national accounts (see United Nations, 1984, 1991, 1993). The various approaches were compiled and synthesized in the United Nations System of Integrated Environmental and Economic Accounting (SEEA) (United Nations, 1993). Unlike the SNA, the SEEA has not been adopted as an international standard and should be viewed as a set of proposals for environmental accounts. The SEEA is a highly flexible framework encompassing approaches that range from reorganizing the current accounts to building a full set of household and nonmarket service accounts. The basic framework envisions adding environmental flows in a series of steps or versions. Version I of the SEEA reorganizes the traditional national accounts to highlight environmental and natural-resource flows. Version II is a restatement of the expenditure-accounting approaches describing the monetary and physical flows and stocks. Version III links the physical information of version II with the monetary data of version I. Version IV imputes environmental damages to obtain a more comprehensive measure of output and includes the depletion of natural resources and environmental pollution costs. Version V, which has not been extensively discussed, considers more radical extensions, such as extending the production boundary in the household sector and introducing environmental services as an output. Since version IV has received the most international attention, it is the focus of the discussion here. Version IV treats environmental degradation and depletion as subtractions from net product. In effect, both depletion and degradation are viewed as sources of depreciation of natural capital. We focus here on two examples of how the SEEA differs from alternative approaches. One is in the estimation of depletion of natural resources such as petroleum, which is valued at market values or sometimes at replacement cost. A second is the cost of environmental degradation—such as water pollution—which is treated either as "costs caused" or "costs borne." Under this distinction, degradation can be valued in terms of either the costs to the sector if it were to eliminate the degradation (costs caused) or the damage to producing or affected sectors due to the degradation (costs borne). For the most part, when implementing the SEEA, researchers have relied on the costs-caused approach. These depletion and degradation estimates are subtracted from conventionally defined value-added to derive environmentally adjusted net income measures. It is useful to highlight the fact that the SEEA relies heavily on costs in its design of environmental accounts. Although it is common practice

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today, the use of restoration-cost estimates to measure environmental degradation and replacement cost to measure natural-resource depreciation is an inconsistent and inappropriate practice. The appropriate approach is to measure the market value (along with the relevant value of nonmarket impacts) of any change in the services of these environmental assets and of the change in the stocks of these assets. As is discussed in Chapter 3, for example, the appropriate valuation of depletion of petroleum stocks is the change in the market value of oil in the ground. Use of the SEEA methodology can lead to inappropriate results. Suppose that the environment is initially clean and that the market and nonmarket damages from emitting a few grams of dust are very small. The cost of maintaining the clear environment by reducing those last few grams of dust might be enormous. Thus, the use of restoration costs as a measure of pollution control benefits (or damages) can lead to a significant overestimate of benefits. Paradoxically, if restoration costs are used to measure damage, the clean economy may be shown to be more environmentally damaged than the dirty society.13 With respect to the degradation estimates, the authors of the SEEA recognize the theoretical difficulties involved in using cost-caused or replacement-cost data. While leaving the door open for the use of valuation estimates based on damages or costs borne, the authors are skeptical of the practical use of valuation techniques and of similar imputation methods. A second notable feature of the SEEA framework is its adherence to conventional SNA sectoring or production boundaries. The close adherence to SNA concepts is an important advantage since it helps ensure consistency with the core accounts. Also, since the SNA framework has been widely adopted, the close adherence of the SEEA to the SNA will help ensure international comparability. This consistency comes at a price, however. The most important shortcoming arises because of the omission of nonmarket services and investments. There is no place in the SEEA system (at least with versions I through IV) for the amenities provided by the environment in the form of recreation, health impacts, erosion control, or disposal services. The SEEA in effect equates the term "nonmarket" with "noneconomic." As a result of the omission of environmental services, the economic link between the economic value of an environmental asset and the services it provides is broken. Thus, while a forest can have economic value 13   An example of the difficulties is seen in the environmental adjustments for the United States using the SEEA approach in Grambsch and Michaels (1994). These adjustments are quite large (about 8 percent of GDP), primarily because of the use of restoration costs to measure environmental damages.

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in the SEEA framework, this value comes only from the commercial products of the forest, such as timber, and not from other forest services, such as watershed protection, recreational services, and carbon sequestration. By neglecting nonmarket assets and services, the SEEA also limits the coverage of household production. Some household production—such as the production of nonmarketed firewood—has both substantial economic value to households and serious environmental consequences due to the pollution from the smoke. A third key feature of the SEEA is the treatment of natural-resource depletion. In conventional accounting, net investment is measured as the change in the value of the stock of an asset between two periods. The SEEA does not employ the usual definition of net investment, but focuses only on natural-resource depletion. Under the SEEA, when resources are depleted, there is a deduction from net output; but when resources are discovered, there is no increment to net output. Hence, even though the stock of petroleum reserves is constant over time, the SEEA would be recording a series of deductions from output and income to reflect petroleum production. The SEEA logic is that discovered resources are not really additions to the stock; they merely represent a shift from the nonproduced, noneconomic stock of assets to the nonproduced, economic stock. If, however, the stock of petroleum were valued in terms of its market value or discounted services, additions and depletions would be treated more symmetrically. Discoveries would increase the value of the stock, while depletion would decrease its value. Environmental Accounting in Other Countries As noted earlier, environmental and natural-resource accounting has been extensively developed in countries outside the United States over the last quarter-century. As in the United States, these augmented accounts represent an attempt to cast light on the interactions between the economy and the environment. In other industrialized countries, three main areas of concern have been identified: Depletion—Some countries have been concerned about the depletion of scarce natural resources. Particularly in northern Europe, where North Sea oil and gas resources constitute a significant fraction of natural assets, policy makers want to determine the extent to which nonrenewable resources are being depleted. Degradation—Many countries have been concerned about the degradation of the natural environment through pollution. Pollution not only renders the air, water, and soils less productive, but has health impacts and degrades people's enjoyment of the environment.

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Protection—Countries adopt numerous measures to protect or restore the environment. These activities include pollution abatement and control expenditures, research into cleaner technologies, ecological taxes, and fiscal incentives for environmentally benign production patterns. Policy makers are interested in the economic costs and impacts of such environmental protection measures. Each of these three major facets of the interaction between the economy and the environment corresponds to a different aspect of economic policy and requires different data sets, concepts, and classifications. A comprehensive environmental accounting system addresses each of these sets of issues. Environmental accounting in the United States has to date addressed primarily the issue of mineral depletion and (up to 1995) the cost of environmental protection. Approaches being applied in other countries involve analyzing different parts of the interaction, such as material flows into and within the economy; recycling; the costs of meeting environmental targets; ecological taxes; and emissions of various pollutants into the air, water, and soils. As noted earlier, other countries have adopted BEA's approach of keeping their environmental and natural-resource accounts in satellite or supplemental accounts; the core national accounts have not been modified to reflect environmental and natural-resource changes. This approach has been endorsed by the European Commission (European Union, 1994:5): The development of a "greened" GNP, although having a certain appeal ..., raises a number of difficult methodological questions which rule it out as a realistic option for the foreseeable future. Therefore what is needed—as a first step—is an approach which makes environmentally interesting parts like resource depletion and environment degradation, firstly in the form of physical indicators, later with the help of available techniques transformed into monetary value, still—however—keeping the various building blocks of such a system of integrated environmental and economic accounting separate, a so-called satellite approach. Thus the European Union has decided to take the same approach as the United States: to focus on creating multiple, integrated data sets that track the interaction between the economy and the environment. This approach emphasizes the multidimensional nature of the interaction, rather than attempting to create a single-number modified GDP. Table 2-1 provides a summary of the major sectors that have been studied in environmental accounts of various high-income countries. This table refers to published studies by official statistical agencies comparable

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TABLE 2-1 Development of Environmental and Natural-Resource Accounts in Major Industrial Countries (synoptic table illustrating areas in which countries are working)   Natural-Resource Accounts Country Forests Subsoil Assets Water Land Material Flows Emissions Pollution Abatement/ Control Australia x x   x     x Austria x     x x x x Belgium               Canada x x x       x Denmark x x x x   x   Finland x   x   x x x France   x x x   x x Germany x     x x x x Holland   x x   x x x Italy     x     x x Norway x x     x x x Spain     x   x     Sweden x       x x x United Kingdom x x x x   x x United States   x   x     x Note: The x's in this table are indicative only. Work is at different stages of maturity, and the situation changes rapidly. to BEA. In addition, extensive work in other areas has been undertaken by private research institutes. To a considerable extent, the focus of the environmental and natural-resource accounting of each country reflects its own national priorities and policy concerns. Therefore, Canada and the Scandinavian countries have highlighted forestry accounts, while densely populated Holland has focused more intensively on pollution of air, rivers (particularly the Rhine), and soils. Some of the environmental accounts are quite close to the existing national accounts; this is particularly the case for the mineral accounts, which are conceptually included in existing national wealth accounts. Other accounts consist primarily of disaggregating existing transactions, such as those concerned with pollution abatement and control expenditures. Another set of accounts represents an extension of existing input-output systems to include physical flows of pollutants along with the purchases and sales of goods and services. The above review indicates that the principles and practices of environmental and natural-resource accounting are well developed in major industrial countries. Countries are concerned about the interaction be-

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tween the economy and the environment, particularly as regards the extent of resource depletion and environmental degradation, as well as the economic costs of environmental protection. Other countries follow the U.S. practice of analyzing environmental linkages in satellite accounts, which provide useful data for both management and scorekeeping without changing the core national economic accounts. U.S. Integrated Environmental and Economic Satellite Accounts History of Environmental Accounting in the Commerce Department Many of the issues considered in the current discussion about expanding the traditional NIPA were involved in the earliest decisions about designing the accounting framework. From the beginning, those within BEA who constructed the NIPA considered aspects of what is now called environmental accounting. It was decided at the outset to focus primarily on an accounting framework whose boundary encompassed market transactions. Interestingly, in early efforts, depletion of mineral assets was a deduction from national product for obtaining net output. This practice was discontinued and depletion removed because the approach was thought to be asymmetrical in subtracting depletion without adding additions. As the idea of augmented accounting began to emerge in the early 1970s, BEA came under pressure to expand its accounts to include significant nonmarket activities, with an eye to improving the accuracy of the accounts as a measure of economic well-being. At that time, BEA was not inclined to develop augmented accounts because it believed that imputations of the volume and values of nonmarket activities would be subjective and based on unproven methodologies and would lead to a deterioration in the accuracy of the national accounts. BEA's initial concern was with the failure of the accounts to treat pollution abatement expenditures consistently. Specifically, if some part of final consumption were devoted to pollution control, GDP would not be affected, but if the business sector devoted the same level of resources to pollution abatement, conventionally measured GDP would fall. Rather than making major conceptual changes to the national accounts, BEA recommended that a separate series on pollution abatement expenditures be developed to interpret movements in national output, rather than to change the definition of national output itself. Work began on the development of such a survey in 1971, and preliminary results were published

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in 1973. Ironically, this first foray of BEA into environmental accounting was eliminated in the budget cuts of the 1990s. In 1972, Congress directed the Secretary of Commerce to study the effect of the costs of the Clean Water Act on manufacturers. In response, BEA and the Bureau of the Census developed an environmental statistics program. BEA formed an Environmental Studies Staff within the Office of the Director. Several activities were initiated to support the planned pollution abatement expenditure series. In particular, BEA added a number of questions on pollution abatement to the November 1973 Plant and Equipment Survey of companies, and in 1974 the Census Bureau began surveying about 19,000 manufacturing establishments with regard to their pollution abatement expenditures. In response to the success of BEA's efforts to develop pollution abatement expenditure data, Congress approved funds that allowed for expansion of BEA's environmental program. In 1977, BEA established the Nonmarket Economics Division, which consisting of three branches—the Abatement and Control Expenditures Branch, the Unit Costs and Emissions Branch, and the Measures of Economic Well-Being Branch (Bureau of Economic Analysis, 1987). The first two of these branches were involved primarily in reconfiguring the data on costs that were already contained in the national economic accounts. The Measures of Economic Well-Being Branch—in a significant departure from conventional national income accounting—focused on the deficiencies of conventional income and output measures as measures of social well-being. The Economic Well-Being Branch conducted research on a number of issues that would arise if the traditional accounts were expanded to better reflect societal well-being. These studies involved the value of nonmarketed household work, the value of services associated with governmental capital and consumer durables, the investment value of education and training, and the value of the discovery and depletion of minerals (Bureau of Economic Analysis, 1982). Methodologies developed in the work on minerals accounting contributed directly to the development of the mineral accounts in Phase I of BEA's IEESA. Although interest in environmental and resource accounting was growing outside the United States, the Measures of Economic Well-Being Branch was abolished in 1981. The Nonmarket Economics Division was cut and renamed the Environmental Economics Division; the work of this new division was confined to the generation and analysis of pollution abatement expenditure data. In 1995, the balance of the program, along with the pollution abatement expenditure survey, was abolished to meet the budget cuts of the 1990s. In the meantime, BEA initiated work in the IEESA system in 1992, but this work, as noted earlier, was stopped by Congress in 1994.

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Overview of the Integrated Environmental and Economic Satellite Accounts Work on the IEESA began in earnest in 1992 and was accelerated when President Clinton emphasized its importance in his Earth Day speech in 1993. The essential framework for the IEESA, along with a proposed framework for future study, was set forth in two articles in 1994 (see Bureau of Economic Analysis, 1994a, 1994b). As envisioned by BEA at that time, the work plan would have three phases: Phase I, Overall Framework and Prototype Estimates for Subsoil Assets—The first phase involved establishing the overall framework and process for developing prototype satellite accounts for subsoil assets such as oil, gas, and nonfuel minerals. The focus was ''on proved reserves, the basis for valuation is market values, and the treatment given mineral resources—which require expenditures to prove and which provide 'services' over a long timespan—is similar to the treatment of fixed capital in the existing accounts" (Bureau of Economic Analysis, 1994a:48-49). The Phase I report of these two articles presented a preliminary view of the framework of U.S. environmental accounts, along with numerical estimates of the values of additions, depletion, and stocks for major subsoil mineral resources. Phase II, Renewable Natural Resources—The second phase "calls for work to extend the accounts to renewable natural resource assets, such as trees on timberland, fish stocks, and water resources" (Bureau of Economic Analysis, 1994a:49). Phase III, Environmental Assets—The third phase "calls for moving on to issues associated with a broader range of environmental assets, including the economic value of the degradation of clear air and water or the value of recreational assets such as lakes and national forests" (Bureau of Economic Analysis, 1994a:49). Since publishing its first report in 1994 in the two above-mentioned articles, BEA has ceased further work on environmental accounting in response to the congressional stop-work order. Summary and Conclusions The last quarter-century has seen an increasing awareness of the interactions between human societies and the natural environment in which they thrive and upon which they depend. This awareness has been dramatically heightened by concerns about resource scarcity, environmental degradation, global environmental issues, and the possibility that the

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economy is not sustainable. The combination of this increasing awareness and recognition of the primitive state of environmental data has led to a widespread desire to broaden the nation's economic accounts to include natural resources and the environment. The idea of including natural-resource and environmental assets and services in the economic accounts is part of a movement to develop broader economic indicators. It reflects the reality that economic and social welfare do not stop at the market's border, but extend to many near-market and nonmarket activities. BEA has studied augmented accounting since the early 1980s. It began work on the U.S. version of environmental accounting, the IEESA, in 1992. Congressional concerns about environmental accounting were raised shortly after the first publication of the U.S. environmental accounts, and Congress requested that work on the IEESA cease until the methodological issues had been reviewed. In response to the congressional mandate, the Commerce Department asked the National Academy of Sciences to undertake a review of environmental accounting, and this report is a response to that request. The NIPA are the most important measures of a country's overall economic activity. From the perspective of environmental accounting, the major point to recognize is that GDP is conceptually defined to include the final output of marketed goods and services—that is, goods and services that are bought and sold in market transactions. While recognizing the need to consider alternative measures, it is important to retain the core market-based accounts, which are of great value for historical and international comparisons and will continue to be a critical indicator for much economic policy making. Work on augmented accounting in official statistical agencies, as well as by individual scholars, has yielded estimates on a wide variety of nonmarket activities for experimental augmented national accounts. The guiding principle in extending the national economic accounts is to measure as much economic activity as feasible, regardless of whether it takes place inside or outside the marketplace. Augmented national economic accounts are designed to provide better measures of final output—of what consumers in the United States currently enjoy in the way of goods and services, and of the accumulation of capital of all kinds that will permit the future production of goods and services. A set of well-designed environmental accounts can overcome the recognized shortcomings of the current market-based accounts. They can provide useful information for managing the nation's public and private assets, for improving regulatory decisions, and for informing private-sector decisions. The collection of data on comprehensive income and output is an investment that would have a high economic return for the nation. There are many examples of the benefits of comprehensive eco-

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nomic accounts. These include better estimates of the impact of regulatory programs on productivity, analyses of the costs and benefits of environmental regulations, management of the nation's public lands and resources, and assessment of the costs and benefits of taking steps to slow global warming. Augmented national accounts can also provide valuable indicators of whether economic activity is sustainable. The national accounts have a close relationship with measures of sustainable income, since the usual measure of NDP corresponds to the highest sustainable level of per capita consumption under idealized conditions. The nation's measures of national income and output can be improved by including all consumption and net investment to obtain augmented income and output measures. Among the currently omitted items that need to be added are nonmarket consumption, such as home production and final environmental services, and nonmarket investments, such as changes in the value of resource stocks and investment in human capital. Over the last quarter-century, official statistical agencies and individual researchers in the United States and abroad have responded to the deficiencies in current accounting approaches by developing alternative approaches and new systems of accounts. An initial general approach is to supplement the accounts with improved data on physical flows. Physical accounting systems are valuable for policy purposes when overall environmental objectives and targets are clearly established. They are an essential component of both economic accounts and environmental policy making. At present, the United States has invested little in developing comprehensive environmental indicators. The development of improved environmental indicators is an important priority for enhancing the nation's ability to evaluate and analyze environmental trends and track the interaction between the environment and the economy. From the point of view of environmental accounting, enhancing the national accounts in a manner that is scientifically and economically sound will require considerable improvement in the underlying physical data. A second approach to environmental accounting is the construction of comprehensive measures of national income or output to supplement the conventional GDP and NDP accounts. Many efforts in this area have been broad-based attempts to remedy general issues raised by the national accounts. Other studies have introduced augmented environmental accounts with a more targeted approach, focusing on how the national accounts would be modified to incorporate the environment and offering estimates of economic activity in sectors providing services of natural resources. Because of the diversity of approaches and controversies about appropriate approaches, no international consensus has been achieved on a

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uniform system of environmental accounts. The 1993 SNA entailed developing environmental satellite accounts as a way of expanding the analytical capabilities of the national accounts without changing the core accounts. In this proposal, environmental accounts would complement rather than substitute for traditional accounts. The principles and practices of environmental and natural-resource accounting are well developed. Countries are concerned about the interaction between the economy and the environment, particularly the extent of resource depletion and environmental degradation, as well as the economic costs of environmental protection. Other countries follow the U.S. practice of analyzing environmental linkages in satellite accounts, which provide useful data for both management and scorekeeping without changing the core NIPA. Intensive work on the IEESA began in the United States in 1992. As envisioned by BEA, the work plan would have three phases: Phase I, which involved establishing the overall framework and developing prototype satellite accounts for subsoil assets such as petroleum, gas, and nonfuel minerals; Phase II, which would extend the accounts to renewable natural-resource assets, such as trees on timberland, fish stocks, and water resources; and Phase III, which would extend the effort to issues associated with a broader range of environmental assets, including the economic value of the degradation of clear air and water and the value of recreational assets such as lakes and national forests.