Chapter 19: Accounting for the environment

19.1 Environmental indicators and state of the environment reporting

19.2 Environmental accounting: theory
19.3 Environmental accounting: practice
19.4 Wealth and genuine saving
19.5 Sustainable development indicators
Environmental indicators and state of the environment reporting: terminology

‘Environmental indicators’/’Environmental statistics’ - biophysical data organised

around environmental issues
‘State of the environment report’ – a compilation of environmental
indicators/statistics

For the USA see Table 19.1 for EPA coverage: go to http://www.epa.gov/roe for the
EPA’s SOER
For the UK see Table 19.2 for DEFRA coverage: go to
http://www.defra.gov.uk/environment/statistics, and see also The environment in
your pocket published by DEFRA.

‘Environmental accounting’ – monetary, sometimes biophysical, data organised

around economic categories
 An almost practical step toward sustainability
An almost practical step toward sustainability is the title of a lecture given in 1992 by
Robert Solow. Based on the analysis of a simple model economy with Q=KαRβ with
α+β=1 and β< α, Solow advanced two ‘key propositions’:
1.‘properly defined net national product’ ‘measures the maximum current
level of consumer satisfaction that can be sustained forever’ so it is ‘a
measure of sustainable income’
2.‘Properly defined and properly calculated, this year’s net national
product can always be regarded as this year’s interest on society’s total stock of
capital’
Putting these together gives a rule for sustainability as constant consumption
3.Maintain the total stock of capital by consuming only the interest on it
In the simple model analysed, this implies adding to the stock of reproducible
capital, K, an amount equal to the depreciation of the stock of the non-renewable
resource, R.
With depreciation measured as the Hotelling rent arising in extraction this is
Hartwick’s Rule.
Two important hedges

For Hartwick’s rule to work in practice, the prices used have to be the ‘right’ ones,
ie to reflect perfect foresight, as eg with the rent evolving according to the
Hotelling Rule. According to Solow it is
Obvious that everyday market prices can make no claim to embody that
kind of foreknowledge. Least of all could the prices of natural resource
products…..The hope has to be that a careful attempt to average out
speculative movements and to correct for other the other imperfections I
listed earlier would yield adjusted prices that might serve as rough
approximations to the theoretically correct ones….The important hedge
is not to claim too much.
There is another ‘hedge’ to be examined shortly. The ‘right’ prices are those that
go with a constant consumption path. They are not those that hold along the
optimal path unless that involves constant consumption, which it will not given
standard assumptions.
 A resource owner in a competitive economy 1
Bt – Bt–1 = iBt–1 + (1 + i)ht–1Rt–1 – Ct (19.2)

B is the size of the bank account, units £s Vt = ht(Xt–1 – Rt–1) (19.3)

ht = (1 + i)ht–1
C is consumption expenditure, units £s
so
W is total wealth, units £s
Vt = (1 + i)(Vt–1 – ht–1Rt–1) (19.4)
R is the total of permit sales, units tonnes
or
X is the size of the remaining stock of Vt – Vt–1 = iVt–1 – (1 + i)ht–1Rt–1 (19.5)
mineral, units tonnes
Then (19.2) and (19.5) in
h is the price of a permit, £s per tonne
Wt – Wt–1 = (Bt – Bt–1) + (Vt – Vt–1) (19.6)
V is the value of the mine, units £s gives
i is the interest rate, assumed constant Wt – Wt–1 = iWt–1 – Ct (19.8)
over time
where Wt = Wt-1 implies
Ct = iWt–1 (19.9)
and
Ct = iW0 (19.10)
is the maximum constant consumption stream
 A resource owner in a competitive economy 2
Given that PV of x forever is x/i
Ct = iW0 (19.10)
B is the size of the bank account, units £s
forever gives
C is consumption expenditure, units £s
W* = W0 (19.11)
W is total wealth, units £s
Income is
R is the total of permit sales, units tonnes
Yt = iBt–1 + (1 + i)ht–1Rt–1 (19.12)
X is the size of the remaining stock of
mineral, units tonnes For Wt = Wt-1

h is the price of a permit, £s per tonne Ct = iBt–1 + iVt–1

V is the value of the mine, units £s for which

i is the interest rate, assumed constant It = Yt – Ct = iBt–1 + (1 + i)ht–1Rt–1 – iBt–1 –

over time iVt–1
= (1 + i)ht–1Rt–1 – iVt–1 (19.13)
which by (19.5) is
It = –(Vt – Vt–1) (19.14)
which is Hartwick’s rule.
 A resource owner in a competitive economy 3
For sustainable income as what can be consumed without reducing wealth
Ysus,t = iWt–1 (19.15)
which is Solow’s ‘properly’ measured income – the level of consumption that can be
maintained forever and the interest on wealth.
Would a resource owner choose constant consumption? It depends.
In 11.4.1 it was established that a necessary condition for maximising the discounted
sum of utilities over time, subject to consumption equal to the change in wealth, is
(in the notation used here)
Uct/Uct-1 = (1+ρ)/(1+i)
so that
ρ<i implies Uct<Uct-1 implies Ct>Ct-1
ρ=i implies Uct=Uct-1 implies Ct=Ct-1
ρ>i implies Uct>Uct-1 implies Ct<Ct-1
given the assumption of diminishing marginal utility.
Optimal and sustainable consumption paths 1

For a representative agent closed model

economy where
Qt=KαtRβt : α + β = 1 and β<α

C0t is the optimal path

CS0 is the highest feasible level of constant

consumption at t =0
CSt is the time path under the optimal plan
for the maximum level of constant
Figure 19.1 Optimal and consumption that would thereafter be
sustainable consumption
sustainable indefinitely – at T, COT is
paths
optimal and CST is maximum sustainable
consumption from T onwards, given that
the optimal path was followed up to T
 Optimal and sustainable consumption paths 2
Figure 19.1 Optimal and sustainable
consumption paths
At T, having followed the optimal
path, C0T is not sustainable.
The maximum constant
consumption level from T on
would be CST.
Using the prices and quantities
from the optimal path will not
generally give correct signals
about the future level of
sustainable income.
To get the right signals it is
necessary to use the prices and
quantities that hold at T on the
path CST.
 Measuring national income: theory 1

Consumption is the purpose of economic activity, so why is the National

Income measure of economic performance defined as consumption plus
investment?
Because current investment contributes to future consumption.
For 

 U(C )e dt
 ρt
Max t
0

St   Q(K )  C
K t t


U(C )  U K is a function of current levels of the variables consumption
t C t
and investment that gives a single valued measure of
performance in terms of the objective function.
Measuring national income: theory 2


U(C )  U K t C t

UC is the marginal utility of consumption. For a linear utility function so that

U(Ct) = UCCt, and using It for the change in the size of the capital stock, this is
UCCt + UCIt
a performance measure in utils. Dividing through by UC gives the
performance measure
NDPt = Ct + It (19.17)
where NDP is Net Domestic Product, also known as NNI for Net National
Income.
From (19.17), NDPt – Ct = It so that Ct>NDPt implies It<0, which implies Kt+1<Kt
and Qt+1<Qt.
For sustainable income as the maximum that can be consumed without
reducing the size of the capital stock, NDPt is sustainable income.
 Measuring national income: theory - taking account of the
environment 1
The adjustments to the measurement of national income required on account
of economy-environment interdependence are derived by considering optimal
growth models where the specification of the constraint set reflects the nature
of the interdependence.
For the model which is the basis for Fig 19.1 – production uses a costlessly
extracted non-renewable resource – the result is
EDPt = NDPt – QRtRt = NDPt – htRt (19.18)
where EDP stands for Environmentally Adjusted Domestic Product, QRt is the
marginal product of the resource in production, Rt the amount used, and ht the
Hotelling rent.
The second term on the rhs is the depreciation of the resource stock.
With NDPt = Ct + It, (19.18) is
EDPt = Ct + It – htRt
so that for total net investment zero, It = htRt, the Hartwick Rule, consumption is
equal to sustainable income.
 Measuring national income: theory – taking account of the
environment 2

For a model where the extraction of the non-renewable is costly, and new
reserves can be established at cost,
EDPt = NDPt – (QRt – GRt)(Rt – Nt) = NDPt – ht(Rt – Nt) (19.20)
where QRt is the marginal product of the resource in production, GRt is marginal
extraction cost, and Nt is additions to the known stock.
For a model where the resource input is a renewable
EDPt = NDPt – (QRt – GRt)(Rt – F{St}) = NDPt – ht(Rt-F{St}) (19.21)
where GRt is the marginal cost of harvesting, F{St} is the stock’s growth function,
and St stock size.
For sustainable yield exploitation, Rt = F{St} and there is no depreciation –
EDPt = NDPt
 Measuring national income: theory – taking account of the
environment 3
Renewable resources, such as forests, can yield amenity services direct to
consumption as well as provide inputs to production.
EDPt = NDPt + (USt/UCt)St – ht(Rt – F{St}) (19.22)
where USt is the marginal utility of standing timber and UCt is the marginal
utility of produced commodity consumption.
Typically USt is unobservable, there is no market price. Chapter 12 methods
are needed.
--------------------------------------------------------------------------------------
These models are not mutually exclusive – production uses non-
renewables, renewables, flow resources. Production and consumption
generate waste flows. The environment provides amenity and life support
services. A comprehensive model needs to capture all such linkages.
 Environmental accounting: practice

It is generally agreed that, leaving aside environmental considerations, the

proper measure of economic performance is Net Domestic Product, NDP, which is
Gross Domestic Product, GDP, less the depreciation of reproducible capital. In
fact, GDP is more widely used than NDP. This is, largely, because it is difficult to
measure the depreciation of reproducible capital.
Environmentally driven criticism of current accounting conventions focuses on
three issues
Natural resource depletion - should be treated in the same way as depreciation
of reproducible capital – measurement and valuation problematic
Environmental degradation – air, water and land quality reductions should be
treated as depreciation – how to measure degradation from what benchmark?
Defensive expenditure – , eg clean-up costs, on the environment should be
deducted – why not other defensive expenditure?
 The UNSTAT proposals: satellite accounting 1

System of integrated Environmental and Economic Accounting, SEEA

Balance Sheets and Satellite Accounts

EC   a v   a v
n n

(19.23)
t it it  1 it  1
i 1 it i 1

Environmental Cost is the change in the balance sheet value, i.e.

depreciation, of all environmental assets, natural capital.
Environmentally Adjusted NDP could be defined as
EDPt ≡ NDPt – ECt ≡ (GDPt – DMt) – DNt (19.24)
where DNt ≡ ECt
 The UNSTAT proposals: satellite accounting 2

SEEA does not envisage national statistical agencies reporting EDP instead of
GNP/NDP.
SEEA does envisage complementing the current GDP/NDP accounts with balance
sheets for natural capital – Satellite Accounts.
Some counties do this already for a limited range of environmental assets –
some of those commercially exploited – eg fossil fuels, minerals, timber. Even in
these cases, measurement of depreciation is problematic, mainly on account of
difficulties with unit valuation.
SEEA does not envisage treating defensive expenditures as part of EC. It does
recommend identifying and reporting environmental defensive expenditures
within the accounting system.
 The depreciation of non-renewable resources

The correct measure of the depreciation of a stock of a non-renewable resource is

D = THR = (P – c)(R – N) (19.25)
where
D is depreciation
THR is total Hotelling rent
P is the price of the extracted resource
c is the marginal cost of extraction
R is the amount extracted
N is new discoveries

In a fully competitive economy would have:

THR = CIV
with CIV for Change in (market) value of the resource stock.
Generally, CIV is not observable. Nor is marginal cost, c.
 Methods used for measuring the depreciation of non-renewable
resources

Net Price II
D = (P – C)(R – N) (19.26) C for average cost, c>C
Net Price I
D = (P – C)R
Change in Net Present Value
T 0 T
D   [(Pt C t )R t /(1 r) ] [(Pt C t )R t /(1 r) ]
t t
1
 (19.27)
t 1
t 0

Given C rather than c, an estimate of CIV.

El Serafy’s (user cost) rule

D = R(P – C)/(1+r)T (19.28)
In (19.27) and (19.28), r is the interest rate, and T is deposit lifetime
Measuring non-renewable depreciation - applying four methods to
the same data

Table 19.3 Alternative estimates of minerals depreciation for

Australia 1988/9 to 1991/2, ASS$ x 106

Year El Serafy rule Net price I Net price II ABS NPV

change

1988/89 952 8511

1989/90 1228 9872 –19321 – 6500

1990/91 1922 12023 –147035 –19900

1991/92 2328 13624 299075 –9700

Total of depreciations calculated for 33 minerals, using data

from ABS (1995). r = 7.5%.
 UK asset values

Table 19.4 UK asset values 1999 - 2007

£billion end year

Oil Gas Oil+Gas Non-financial Residential

Assets Buildings

1999 46.964 30.495 77.459 3877.5 1848.9

2000 53.611 43.011 96.622 4245.1 2106.5

2001 51.812 50.451 102.263 4484.8 2267.8

2002 50.883 46.566 97.449 5076.8 2737.1

2003 53.045 44.250 97.295 5522.2 3054.9

2004 78.536 50.754 129.29 6069.0 3427.0

2005 100.192 65.402 165.594 6283.0 3555.0

2006 120.921 69.439 190.36 6863.1 3915.3

2007 177.891 68.340 246.231 7380.0 4313.6

Source: Office of National Statistics 2008a

2007 - oil and gas less than 5% of Non-financial Assets, less than 10% of Residential Buildings
Oil and gas deprecation in the UK

10000

-10000

-20000
oil
-30000 gas
total
-40000

-50000

-60000

-70000

Figure 19.2 Oil and gas depreciation

for the UK 2000-2007

Derived from data on year end asset

value – ONS 2008a
Australian asset values
Table 19.5 Australian asset values 2002 - 2006
$billion 30th June
2002 2003 2004 2005 2006
Total NFA 4004 4435.9 5014.8 5391.4 5876.7

Produced 2150.0 2291.5 2482.5 2702.1 2932.9

Machinery and 346.9 352.3 361.2 382.6 409.3

equipment
Dwellings 812.4 892.5 991.6 1086.2 1172.1

Non-produced 1854.7 2144.3 2532.3 2689.3 2943.8

Land 1639.8 1920.4 2284.0 2417.7 2633.3

Subsoil 204.9 213.6 237.2 260.2 298.8

Forest 1.9 2.0 2.1 2.2 2.2

Source: ABS 2008.

NFA – non-financial assets
Subsoil – all economically significant non-renewable and mineral
resources, valued using the present value method – about 5% of
NFA, less than Machinery and equipment, Dwellings
Forests are native forests, plantations get counted as produced
assets. Both valued at commercial value of standing wood.
 Environmentally adjusted national income - Indonesia

Year GDP Index EDP Index EDP/GDP

The first attempt to do this? By the
1971 1 1 1.20
World Resources Institute, using their
1972 1.09 0.90 0.99
estimates with official GDP estimates.
1973 1.22 0.97 0.96
Depreciation for:
1974 1.32 1.48 1.36

1975 1.38 0.98 0.85

Oil – Net Price II
1976 1.47 1.12 0.92 Timber – Net Price II allowing for growth
1977 1.60 1.08 0.81 Soil – physical loss valued using loss of
1978 1.73 1.19 0.78 agricultural output
1979 1.83 1.19 0.78 The results are dominated by changes in
1980 2.01 1.28 0.76 the price of oil, and new discoveries of
1981 2.17 1.48 0.82
oil – EDP rose by 51% 1973 to 1974
1982 2.22 1.58 0.86

1983 2.32 1.49 0.78

1984 2.44 1.68 0.83

Source: Based on Repetto et al (1989)

Environmentally adjusted national income - UK
Table 19.7 UK GDP, NDP and NDP adjusted for oil and gas depreciation
2001 2002 2003 2004 2005 2006 2007

GDP 102182 107556 113974 120059 125250 132186 140104

8 4 6 5 5 0 2
-FCC 115796 121914 125603 135184 138520 147858 158143

=NDP 906032 953650 101414 106541 111398 117400 124289

3 1 5 2 9
-DEPCTN -5641 4814 154 -31995 -36304 -24766 -55871

=EDP 911673 948836 101398 109740 115028 119876 129877

9 6 9 8 0

GDP growth 5.3% 6.0% 5.3% 4.3% 5.5% 6.0%

NDP growth 5.3% 6.3% 5.1% 4.6% 5.4% 5.9%

EDP growth 4.1% 6.9% 8.2% 4.8% 4.2% 8.3%

Source: derived from ONS 2008b.

FCC – Fixed Capital Consumption, depreciation of reproducible capital
DEPCTN – end year to end year balance sheet changes for Oil+Gas
These are current value figures – no adjustment for inflation
 Environmentally adjusted national income - Australia
Table 19.8 Australian GDP, NDP and NDP
after net depletion adjustment
2001/2 2002/3 2003/4 2004/5 2005/6
While the Australian statistical agency,
GDP 735714 781675 840285 896568 965969
ABS, does not adjust the national income
-FCC 115259 121526 127754 134523 145476 estimates in its main publications, it did
do that in Year Book Australia 2008.
=NDP 620455 660149 712531 762045 820493

1317 865 894 87 234

Units are millions of current AUS$.
-ADJSTMNT

=EDP 619138 659284 711637 761958 820259 FCC – Fixed Capital Consumption
ADJSTMNT – the ‘net depletion
adjustment’ which is
Growth rates

GDP 6.7% 6.2% 7.5% 6.7% 7.7%

subsoil (fossil fuels and
minerals) extraction
NDP 6.6% 6.4% 7.9% 6.9% 7.7%
plus
EDP 6.5% 6.5% 7.9% 7.1% 7.7%

5.0% 5.6% 6.0% 6.3%

land degradation
GDP pc
less
Source: ABS 2008. subsoil additions
 Wealth and genuine saving 1

EDPt = Ct + IRt + DNt (19.29)

So
EDPt > Ct for (IRt + DNt) > 0
EDPt = Ct for (IRt + DNt) = 0
EDPt < Ct for (IRt + DNt) < 0
so that maximum consumption consistent with not running down the capital
stock is Ct = EDPt, so that EDPt is sustainable income
Sustainable development requires
Ct ≤ EDPt (19.30)
Ct = EDPt implies that IRt and DNt are equal and of opposite sign so that (IRt +
DNt) = 0.
 Wealth and genuine saving 2
With KRt for reproducible capital and KNt for natural capital we can write
Wt = KRt + KNt (19.31)
where W stands for wealth as the aggregate capital stock. For Wt+1 we can write
Wt+1 = (KRt + IRt) + (KNt + DNt)
so that
Wt+1 - Wt = IRt + DNt
which by equation 19.29 is
Wt+1 - Wt = EDPt - Ct (19.32)
so that Wt+1 - Wt ≥ 0 if Ct ≤ EDPt.
Hence,
Wt+1 - Wt ≥ 0 (19.33)
is equivalent to the expression 19.30 as a test for sustainable development. Wt+1 - Wt is
what is now widely known as 'genuine saving' or 'genuine investment' for period t.
 Theory for an imperfect economy 1
The earlier theory supporting EDP as the proper measure of national income was
derived for an optimising economy. Dasgupta (2001),for example, argues that non-
negative genuine saving/investment is a test for sustainable development that does
not require the optimising assumption.
For constant population, social well-being at is


V   U (C )e
t t
  ( t )
dt (19.35)
 t

A consumption stream beginning at t = 0 is said to to correspond to a sustainable

development path if at t
dV
0 t

dt
Vt+1 ≥ Vt, see Appendix 19.3, is equivalent to
N dA
I p
t
G
it
it
 0 (19.36) where
i 1
dt
G dA
I t
it

dt
Is Is and pit is the accounting price for
Genuine Change asset i
saving in asset i
 Theory for an imperfect economy 2

The accounting price for asset i is the change in Vt consequent on an

infinitesimally small change in the size of i at t, other things equal.
Accounting prices depend upon four related factors:
(a) the conception of social well-being,
(b) the size and composition of existing stocks of assets,
(c) production and substitution possibilities among goods and services, and
(d) the way resources are allocated in the economy. ( Dasgupta 2001 p 123)

The price of getting away from results based on the assumption of optimisation
is the assumption that the accountant can forecast all of the utility
consequences of small perturbations in all relevant asset stock sizes through
to the distant future.
And, no differences in the conception of social well-being?
 Problems with genuine saving as a sustainability test 1
Clearly, no accountant could could have the information for a
comprehensive measure of genuine saving.
The implicit claim must be that aggregating over a wider range of assets
using estimates of accounting prices will produce a better guide to policy
than looking just at investment in reproducible capital.
While plausible, this is not generally true – looking at an extended but
incomplete range of assets may produce a result further from the truth.
Genuine savings/investment results need to be treated with caution as tests
for sustainable development and guides to policy.
 Problems with genuine saving as a sustainability test 2
Table 19.9 Numerical example for incomplete genuine saving accounting
Time KR K1N K1S K1H K0N K0S K0H W

0 100 1000 100 100 500 100 100 2000

1 102 950 101 101 550 110 120 2034
Change 2 -50 1 1 50 10 20 34

KR KeN KeS KeH We

0 100 1100 50 50 1300

1 102 1000 51 51 1204

Change 2 -100 1 1 -96

Actual genuine saving is 34

Looking just at reproducible capital says 2
Measured genuine saving is –96 - opposite sign to actual.
 World Bank estimates of genuine saving

In World Bank (2006), for each country

Genuine saving = Gross Saving (GNI less private and public consumption, plus foreign transfers)
- Depreciation of reproducible capital (replacement value)
+ Educational expenses (public sector operating expenses)
- Depletion of natural resources (energy, minerals and forest depletion using Net
Price I)
- Pollution damages (CO2 damages at $20 per tonne carbon emission)
It is noted that ‘we should be cautious in interpreting a positive genuine saving rate’
as ‘There are some important assets omitted from the analysis’. A negative genuine
saving rate should also be interpreted cautiously.
 World Bank - Genuine saving and income
%
25

20
Vertical axis is % of GNI
15
Low
10 Middle
High
5

-5

1970 1975 1985 1995 2004

Figure 19.3 Genuine saving by
income group
 World Bank - Genuine saving in world regions
%
30
Vertical axis is % of GNI
20 For the world, genuine saving is
World around 10% over 1974-2004
10
Middle East and Africa strongly
Middle East and
0
Africa influenced by oil and gas
East Asia extraction, and price changes for
-10
such. Results here consistent with
-20 rents being consumed, rather
than invested in reproducible
-30 capital.
1974 1980 1990 2004

Figure 19.4 Genuine saving for

selected regions and the world
 World Bank – total wealth and its components
Table 19.11 Asset values for income groups and the world, $ per capita
Income Produced Natural capital
capital
group

Subsoil Timber NTFR Cropland Pastureland Protected Total

areas

Low 1174 325 109 48 1143 189 111 1925

Middle 5347 1089 169 120 1583 407 129 3496

High OECD 76193 3825 747 183 2008 1552 1215 9531

World 16850 1302 252 104 1496 536 322 4011

Source: World Bank 2006

Per capita asset values increase with income
Ratio of produced to natural capital value increases with income
Share of natural capital as agricultural land decreases with income
Share of subsoil assets in natural capital increases with income
 Accounting for international trade 1
Consider 2 trading economies, 1 and 2. Let x12 be exports from 1 to 2, and x21 be exports from 2
to 1. Let y represent total output, and f represent final demand, comprising c for consumption
and s for saving/investment. We can then write:

y1 = x12 + c1 + s1 = x12 + f1
(19.37)
y2 = x21 + c2 + s2 = x21 + f2

If we define coefficients q12 = x12/y2 and q21 = x21/y1, equations 19.37 can be written as

y1 = 0 + q12y2 + f1

y2 = q21y1 + 0 + f2

which in matrix notation, using upper case letters for matrices and lower case for column
vectors, is

y = Qy + f

with the solution

y = (I - Q)-1 f = Lf (19.38)
where I is the identity matrix.
 Accounting for international trade 2
Now, let

D1 = DM1 + DN1 = dm1y1 + dn1y1 = z1y1

D2 = DM2 + DN2 = dm2y2 + dn2y2 = z2y2

where M and m subscripts refer to human made capital and N and n subscripts refer to natural capital, so that we can write
for total global depreciation

D = z1y1 + z2y2

or, in matrix notation

D = z’y (19.39)

where z’ is [z1 z2]. Substituting for y in Equation 19.39 from Equation 19.38 gives

D = z’Lf

or

T = ZLF (19.40)

where Z and F are matrices with the elements of z and f along the diagonals, and zeroes elsewhere. For the two country
case, Equation 19.40 is:

t 11 t 12  z 1 l 11 f1 z 1 l 12 f 2 
t t   z l f z l f 
 21 22   2 21 1 2 22 2 
 Accounting for international trade 3
T = ZLF

where Z and F are matrices with the elements of z and f along the
diagonals, and zeroes elsewhere. For the two country case

 t t  z l f z l f 
 t t   z l f z l f 
11 12 1 11 1 1 12 2

 21  
22 2 21 1  2 22 2

In the matrix T the row elements give depreciation in a country arising by virtue of final demand
in that and other countries, while column elements give depreciation in all countries by virtue of
final demand in one country. So, row sums, DiIN , give depreciation in i, and column sums, DiATT,
give depreciation attributable to i. Thus, in the two-country case here t11 + t12 is the depreciation
of total capital actually taking place in country 1, while t11 + t21 is the depreciation of capital in
the global economy that is on account of, attributable to, final demand in country 1.
 Accounting for international trade 4
A slight extension of the method of Proops and Atkinson allows for consideration of these issues
on a per capita basis. Let P be the matrix with the reciprocals of population sizes along the
diagonal and zeroes elsewhere. Then, for the two-country case,

A = TP = ZLFP (19.41)

is
a 11 a 12  z1 l 11 (f1 / p 1 ) z1 l 12 (f 2 / p 2 )
a a   z l (f / p ) z l (f / p 
 21 22   2 21 1 1 2 22 2 2 
so that column sums from A, diATT, give depreciation in all countries attributable to per capita
final demand in country i. And,

B = PT = PZLF (19.42)

is
b 11 b 12  (z1 / p 1 )l 11 f1 (z1 / p 1 )l 12 f 2 
b b   (z / p )l f (z / p )l f 
 21 22   2 2 21 1 2 2 22 2 

so that row sums from B, diIN, give per capita depreciation in country i on account of global final
demand. These depreciation measures can be compared with si, per capita saving in i.
 Per capita saving and depreciation by region
Some entries from Table 19.11 Excesses of per capita saving over depreciation – difference
from global excess
(si-diIN) - (s-d)
US$ In natural capital only nonrenewables
1980 1982 1984 1986 1988 accounted for here.
W.Europe 570 341 344 522 764
For the world as a whole, genuine
USA 153 -200 38 -429 -401 saving positive
Africa -102 -68 -113 -140 -238
Looking at things on the attributable
Middle East -578 853 -1024 -1135 -978 basis does not much alter the general
picture
s-d 173 76 106 109 220 Africa’s contribution always negative
Mid East usually negative
(si-diATT) -(s-d)
US$
Takes no account of ability to save –
1980 1982 1984 1986 1988
income levels.

W.Europe 440 249 306 528 754

USA 48 -271 -141 -613 579

Africa -102 -79 -119 -146 -246

Middle East 238 -273 -708 -950 -779

 Sustainable development indicators 1

Sustainable development indicators – efforts by official agencies, and others, to

provide data on the natural environment and the economy relevant to sustainable
development, other than via modified national income or wealth accounting.
1994 – UK government adopted strategy for sustainable development
1996 – began publication of indicators to monitor progress
Sustainable development indicators in your pocket (DEFRA) is organised around four
‘priority areas’ ( see also DEFRA website )
Sustainable consumption and production
Climate change and energy
Protecting natural resources and enhancing the environment
Creating sustainable communities and a fairer world

Aggregation to produce a single ‘bottom-line’ indicator is explicitly rejected –

it is not practicable or meaningful to combine all 126 disparate indicator measures
into a single index of sustainable development. Aside from the technical difficulties
involved, some indicator measures are more important than others and key
messages would be lost (DEFRA 2008b)
 Sustainable development indicators 2 – ISEW/GPI
ISEW – Index of sustainable economic welfare
GPI – Genuine progress indicator
Daly and Cobb 1989 version
ISEW  {(C/D) + (E + F+ G + H)– (I + J + K + L + M + N + O + P + Q
+ R + S + T + U) + (V + W)}/Pop (19.43)
C is personal consumption expenditure
D is an index of distributional inequality
E is an imputed value for extra-market labour services
F is an estimate of the flow of services from consumer durables
G is an estimate of the value of streets and highway services
H is an estimate of the value of publicly provided health and education services
I is expenditure on consumer durables
J is an estimate of private defensive spending on health and education
K is expenditure on advertising at the national level
L is an estimate of commuting cost
M is an estimate of the costs of urbanisation
N is an estimate of the costs of automobile accidents
O is an estimate of water pollution costs
P is an estimate of air pollution costs
Q is an estimate of noise pollution costs
R is an estimate of the costs of wetlands loss
S is an estimate of the costs of farmland loss
T is an estimate of the cost of non-renewable-resource depletion
U is an estimate of the cost of long-term environmental damage
V is an estimate of net additions to the stock of reproducible capital
W is the change in net overseas indebtedness
 GDP and GPI compared

40000 Despite differences in the

35000 GDPpc adjustments made to personal
consumption across ISEW/GPI
30000
exercises, results generally similar:
25000
For every society there seems to be a period in
20000 which economic growth brings about an
15000 improvement in the quality of life, but only up
GPIpc to a point – the threshold point – beyond which
10000
if there is more economic growth, quality of life
5000 may begin to deteriorate. (Max-Neef 1995)
0 Sensitivity analysis (Neumayer 2000)
1950 1974 2004 suggests that if here is a threshold, it is
not due to movements in the
Figure 19.5 GPI per capita and GDP per environmental components of the index.
capita for the USA 1950-2004 Results do appear to be sensitive to
assumptions about unpaid labour.
Source: Talberth et al 2007
 The economy and the environment again: what the economy does

Environment The economy extracts materials and

energy from the environment, using them
Extractions along with capital and labour to produce
Insertions the means to the satisfaction of human
needs and wants, and inserts back into
the environment an equal mass of waste
Economy
(Chapter 2)
Common (2007a) suggests that a natural
measure of economic performance would
Satisfactions be
E = S/I
Figure 19.6 What the economy does with
E for efficiency
S for satisfaction
I for (environmental) input
 Aggregation without prices
E = S/I
For S use
HLY = H x LY
where HLY is Happy Lifetime Years
H is the average score for self-assessed happiness/satisfaction (Chapter 3)
LY average life expectancy at birth
For I there is no uniquely correct measure. Use as proxies
Energy use – a measure of work done, which is what impacts on the
environment
Ecological footprint – the area of land and water to provide environmental
inputs and absorb wastes
Greenhouse gas emissions – the source of the major environmental problem
now facing the world
 Performance converting environmental impact into satisfaction
Table 19.15 Highest and lowest E scores
ECE ETE EF EG1 EG2

Country HLY Country HLY Country HLY Country HLY Country HLY
per per per per ton per ton
toe1 toe1 ha Carbon2 Carbon2
Bangladesh 336.00 Banglades 181.44 Banglades 56.00 Uruguay 501.00 Jordan 512.86
h h
Senegal 104.33 Morocco 91.20 Vietnam 54.00 Banglades 168.00 Albania 113.00
h
Morocco 95.00 Philippines 64.77 Peru 45.89 Vietnam 144.00 Banglades 112.00
h
Honduras 94.2 Albania 62.85 India 42.63 Albania 84.75 Vietnam 108.00

Philippines 88.60 Peru 62.28 Morocco 42.22 El Salvador 71.86 El Salvador 100.60

Canada 7.41 USA 6.87 Latvia 7.55 Canada 9.23 Australia 8.81

USA 7.14 S Africa 6.77 Ukraine 7.48 Australia 8.69 USA 8.78

Luxembourg 7.00 Russia 6.68 Russia 6.43 Russia 7.65 Ukraine 8.52

Russia 6.74 Ivory Coast 6.04 USA 6.01 Estonia 7.35 Estonia 8.18

Iceland 5.39 Tanzania 3.50 Estonia 5.22 Zimbabwe 7.18 Russia 7.86

ECE – commercial energy. ETE – total energy. EF – ecological footprint.

EG1 – greenhouse gas emissions including land use changes
EG2 – greenhouse gas emissions excluding land use changes

1 toe for tonnes oil equivalent. 2 all ghgs converted to heating equivalent CO2
 Efficiency based sustainable development indicators

1. Each nation’s ghg emission allowance to be its population size multiplied by an

equal per capita share of the set global emissions total. For the ith nation
GHG  sP
*
i i

where
*
GHG
s
P
Country i experienced sustainable development if
Ei,t+1>Ei,t and GHGi,t≤GHG*i and GHGi,t+1 ≤GHG*i.
If, that is, E increased and emissions stayed within equitable
allowance.
2. For F*i as a nation’s share of the world’s available productive
land and water(per capita share of global times population size),
country i experienced sustainable development if
Ei,t+1>Ei,t and Fit ≤F*i and Fi,t+1 ≤F*i
If, that is, E increased and footprint stayed within equitable
allowance.