Ecologists and environmental economists’ scorn how superficially countries maintain their financial and national accounts. Amounts spent on building human skills, providing education, nutrition, safeguarding health, land, air and water quality or forests are classified as consumption expenditure in the national accounts, except for the associated construction and equipment purchased. Budgetary allocations in India for such social support, lag those in comparative economies. We view such expenditure as peripheral to economic growth versus physical infrastructure, contrary to what environmental economic accounting would suggest, that these are investments for safeguarding human and other natural capital.
National accounts measure output by assessing income generation. Environmental economic accounts measure output as the change in natural capital (as distinct from physical capital- buildings, roads, machinery- all of which degrade natural capital). The flaw in the national accounts approach of focusing on the output generated from capital is that, it does not have a “sustainability” check.
Environmental economists instead, deduct from annual output, the value of natural capital degraded in the process of generating income, to assess whether economic growth is negative or positive. A negative growth is unsustainable, because it borrows from the future to enjoy income today- a Ponzi scheme which cannot be played endlessly- akin to a country accumulating debt without building the capacity to repay it.
The flawed logic of substitutability and infinite supply of natural resources
The logic of not accounting for the stock of natural resources in the United Nation Statistical Commissions (UNSC) approved system of national accounts, followed worldwide, is simply that natural resources were, till very recently, presumed to be inexhaustible and in specific cases even substitutable. Wood can be replaced by limestone-based cement and iron for building houses. Coal is replaceable with petroleum oil or natural gas or biofuels, or newer forms of renewable energy for our energy services. Consequently, there was never a pressing need to place a value on the stock of natural wealth or biodiversity. Nature was assumed to be so richly endowed that the scarcity of one resource or species could be filled by another species “waiting in the wings” to take over and technology could facilitate the substitution.
Ecologists and environmental economists reject the assumption of infinite substitutability of natural resources, as based on less than adequate knowledge of how nature works. They view the stock of natural resources as the outcome of innumerable complementary processes between specific resources, linking them together organically. Extracting a part of the whole, could disturb the equilibrium and send a stable ecosystem over the “tipping point” – a phrase we are now familiar with, since the impact of cumulative carbon emissions on global warming and climate become the subject of close scientific scrutiny. Sadly, unraveling the functioning of the ecosystem remains a work in progress. But only the brave would reject outright the proposition that nature needs to be handled with care, like the finest China.
Recognizing the need to make economic accounting, environment sensitive, the UNSC formulated the System of Environmental Economic Accounts (SEEA) in 2012. “The SEEA (central framework) applies the accounting concepts, structures, rules, and principles of the SNA to environmental information. Consequently, it allows for the integration of environmental information (often measured in physical terms) with economic information (often measured in monetary terms) in a single framework”.
Multilateral exuberance post 1990
The early 1990s were full of promise. The collapse of the Soviet Union in 1989 generated a gush of expectations that fractured global segments could integrate into a networked market, producing benefits all around. The 1980s, spectacular economic success from integrating China into the global economy, evidenced that this enthusiasm was not misplaced. The world seemed set on converging to an “international rules-based order” managed through multilateral consensus. This rush for multilateral solutions to vexed problems, was evident in the 1992 Earth Summit at Rio de Janeiro, which initiated the Framework Convention on Climate Change, thereby institutionalizing one of the substantive international agreements on global environmental management.
The 2015 Conference of Parties, meeting in Paris, set nations on the path of voluntarily committing to decarbonization pathways. National decarbonization commitments have since become routine even for the developing economies. India, for instance, voluntarily enhanced commitments in 2019 at the Glasgow COP over its 2015 commitments at Paris, and committed to Net Zero by 2070, versus China and Indonesia’s commitment of becoming Net Zero before 2060, whilst the advanced economies clustered around 2050 for achieving that target. Net Zero targets by 70 countries now cover 76 percent of the carbon emissions.
But more needs to be done. A minimum 45 percent reduction in carbon emissions is needed over the global 2010 emissions level by 2030, to achieve Net Zero by 2050. Instead, the national commitments of the 193 countries to the Paris Agreement aggregate to an estimated 14 percent increase in carbon emissions by 2030.
United States puts a tentative green foot forward
President Biden instructed the federal Government on Earth Day April 22, 2022 to take the lead in preserving biodiversity and old forests at home. The Director of the Office for Management of the Budget is to issue guidance on “the valuation of ecosystem and environmental services and natural assets in federal regulatory decision-making”, The plan is that natural capital accounting-based metrics measure progress over time and that the Federal Government works with the international community to advance implementation over a fifteen-year phased period.
European Union – The leader in the pack
The European Union (EU) made it mandatory in 2013 to compile air emission accounts, environmental taxes and subsidies and material flow accounts. In 2017 the mandate was extended to transmit to Eurostat environmental goods and sector services accounts. The EU is pursuing an active environmental strategy imposing carbon taxes on carbon intensive imported goods, like steel and aluminum, from 2026. During the transition phase 2023-25 importers must report the levels of carbon in the products they import and buy an import entitlement valued at the price determined by the EU carbon market. The idea is to level the field for EU producers of such goods. Carbon taxes paid overseas on such imports can be netted out, thereby incentivizing domestic carbon tax in exporting countries.
The market price of carbon in the EU increased significantly, topping Euro 97 per tonne of carbon, in 2022. Compare this with the long spell of stagnation- 2009 to 2018- when the price remained below Euro 20 per tonne and below Euro 10 a tonne from 2011 to 2017. Janet Yellen, United States, Treasury Secretary called for the EU to recognize that many jurisdictions use methods other than carbon price to control carbon emissions and allowances should be made for those regulations too.
India – A graduated approach to green accounting
In India the Central Statistical Organisation (CSO) leads on embedding environmental economic valuations into natural capital stocks and services. Following on the 1992 Earth Summit CSO produced a Framework for the Development of Environmental Statistics (FDES). A Compendium of Environmental Statistics was released in 1997 and updated periodically. The Ministry of Statistics and Plan Implementation commissioned a set of studies between 2000 to 2006 assessing and valuing land, forests, air, water, and sub soil resources.
An expert group chaired by Dr Patho Dasgupta released a report “Green National Accounts in India” in 2013, which proposed a framework, aligned with the SEEA framework. CSO released physical accounts for four resources – land, water, minor minerals, and forests in 2018. EnviStats 2019 added a quality index for two resources – soil and water and valued two services – cropland ecosystem services and natural resource-based tourism services.
The task of making government financial accounting systems compatible with environmental economic accounting is being led by the Government Accounting Standards Advisory Board (GASAB) under the Comptroller and Auditor General, which published a Concept Paper on “Natural Resource Accounting in India” in June 2020. There has been significant activity, since the 1990s, around natural resource accounting. But we are nowhere near integrating environmental accounts into the national accounts.
Miles to go
A 2020 UNSC global survey of implementation of environmental-economic accounting found that 89 countries had complied at least one account in the last five years – up from just 54 in 2014- whilst 62 countries are doing so regularly. One way of checking governments’ commitment to a program is to assess the resources being made available for it. In 2020, on average, governments had allocated only 3.7 full time staff for environmental economic accounting. Developed countries had allocated, on average, 5 full time staff, illustrating marginal but consistent commitment to green accounting.
Nevertheless, environmental economic accounting at the ecosystem level (SEEA EA) is already key for sector decision making – best illustrated by the case of carbon emissions. Achieving the 2030 global target of reducing carbon emissions to 45 percent below the 2010 level is one way, to make governments, the private sector and citizens believe that environmental economic accounting is a useful tool. After all, only that which gets measured, gets done.
This opinion piece first appeared in http://www.orfonline.org on September 30, 2022 https://www.orfonline.org/expert-speak/green-accounting-valuing-our-common-future/