From P2P Foundation

= a form of accounting that takes into account the value of environmental capital and services, as well as the cost of environmental degradation

Description

Stu Crawford:

" The use of ecological fiscal reform requires whole-cost accounting. The value of environmental capital and services, as well as the cost of environmental degradation, must be calculated in order to create the appropriate monetary incentives and disincentives. When the entire value of environmental services and environmental capital resources is known, along with the effect of human activity on this value, intelligent decisions can be made within the economic framework.

This sort of measurement is very difficult. Constanza et al published a report in 1997 that tried to put a price tag on the value of basic ecosystem services. This report synthesized results from more than 100 published studies and used a variety of evaluation methods to look at the value of 17 basic ecosystem services across the planet. The report came up with an estimate for the value of earth's ecosystem services of $33 trillion US. This $33 trillion dollars is a very conservative estimate as it omits all of the processes that we have yet to understand (Pimm, 1997). For comparison the global GNP is about $18 trillion dollars.

There have been various attempts at whole-cost accounting by different countries. The Panel of Integrated Environmental and Economic Accounting (PIEEA) is attempting to develop the US National Income and Products Accounts (NIPA) in such a way as to include natural resources and the environment. They feel that the NIPA should measure as much economic activity as is feasible, whether inside the market place or not. Better natural resource and environmental accounts are beneficial because they will help us determine the sustainability of various behaviours; characterize interactions between the environment and the economy; and provide information on the implications of different regulations, taxes, and consumption patterns.

The PIEEA determined that they should phase natural resources and the environment into the NIPA in three stages. First subsoil mineral assets would be included. Then renewable and other natural resources such as timber. And finally to include non-market environmental assets such as clean air and water.

None of this information was available to the PIEEA. The US only has the barest outline of natural resource and environmental accounts, and only has numerical estimates for subsoil mineral assets. To follow the PIEEA's recommendation they would need to refine the initial estimates of subsoil minerals, construct forest accounts, and then build accounts of agricultural assets, fisheries, and water resources.

Currently, because of the lack of knowledge around environmental accounts, the PIEEA recommends that such environmental accounts not be included in the core of the NIPA. They should be kept in satellite accounts that can be accessed by interested individuals but not actually be part of the economic calculation. This is because of the preliminary nature of the data. But data on such a complex system as the world's ecosystem will always be preliminary! If the economic system cannot handle the preliminary nature of ecological data then it is not robust enough to be used for intelligent resource use decisions.

As it is, the preliminary nature of the data on subsoil mineral assets has created some obviously faulty conclusions. The PIEEA concludes that "[subsoil mineral asset] depletion does not appear to pose a threat to sustainable economic growth" (National Research Council, 1999, pg 5). When the depletion of a non-renewable resource does not have an effect on sustainability there is obviously something wrong with the model being used to calculate economic growth! Because of the lack of robustness of the economic model, incomplete knowledge has resulted in an erroneous conclusion.

The Pembina Institute for Appropriate Development is undertaking a similar effort for Alberta (Anielski et al, 2000). The Pembina Institute is developing the Genuine Progress Indicator (GPI) as a replacement for the GDP as an indicator of economic growth. Traditional measures of economic progress such as the GDP are incomplete measures of economic growth because they fail to account for the depletion and pollution of natural resources, the value of services provided by nature, and many benefits and costs to societal well-being. Environmental and social disasters (such as the Exxon Valdez oil spill or the Montreal ice storm) actually increase the GDP. The GPI is an attempt to have a real measure of prosperity. The GPI considers social, economic, and environmental aspects of wealth, assigns them all a monetary value, and then roles them into one monetary figure that shows how well the nation is doing. Beneficial activities such as volunteer service and caring for children are given monetary value while things like economic disparity, crime, greenhouse gas emissions, and environmental destruction are assigned a cost.

GPIs have been developed for the USA and a few other countries and preliminary work has been done in Canada. The Pembina Institute hopes that after the GPI becomes accepted we can move away from rolling wealth into one lump sum and look at individual aspects of progress, but at the present a single monetary figure is needed for calculations (Mark Anielski(8), Amy Taylor(9), personal communication). Breaking down all costs and benefits to humanity to a single monetary figure is very problematic and because of this the GPI figures for Alberta are very preliminary (Amy Taylor, personal communication).

Whole-cost accounting requires that nations build the environment into their economic calculations. There are three types of interactions that need to be categorized. Additions and subtractions of natural resources need to be accounted for (harvesting, mined, grown). Alterations in the quality of the natural environment that occur in the air, water, and soil must be accounted for. And so must expenditures made to reduce the impact of economic activities on the environment. All of these calculations are very complex and require a lot of research.

Calculating the effect of additions and subtractions to natural resources requires a measure of the amount of environmental capital that is present. The simplest resource to calculate this for are the non-renewable subsoil mineral resources (ore, petroleum, etc.). There is more data available for these resources than for other resources. There is also accepted scientific methods for calculating the amount of these resources and accepted economic methods for valuing them. Subsoil mineral resources are also relatively constant, with the only major additions or subtractions being intentional human mining of the resource. But even with the relative simplicity of measuring subsoil mineral resources, there are several difficulties with economic measurement. Calculations can be complicated by the value of unproven reserves; the impact of ore-reserve heterogeneity on valuation calculations; distortion introduced by associated capital and production constraints; the volatility in the value of mineral assets introduced by short-run price fluctuation; and the difference between the market and social value of the resource.

Calculating the capital value of other natural resources can be more complicated. Even if the quantitative amount of that resource can be calculated, giving that resource a monetary value so its additions and subtractions can be calculated is very difficult. The pricing of some environmental products can be accomplished by valuing a near-market product by comparing it with a market counterpart. This is effective but only works when such a counterpart can be found. If there is no market counterpart, behavioural estimates such as the travel-cost method or hedonic-analysis can be used instead. The travel-cost method measures the value of an ecological recreational resource by measuring how much people will spend (in time or other resources) to get there. Hedonic-analysis measures the value of each component part of the natural resource to individuals. A last option for measuring the monetary value of a natural resource that can be used if the market-based or behavioural-based estimates can not be used is contingent valuation. Contingent valuation uses surveys to determine individuals' stated values for natural resources. This method is problematic because it doesn't seem to be based in any actual behaviour.

Calculating the value of natural resources using market-, behavioural-, or contingent-based estimates is very problematic. Natural resource assets are complex systems of component parts that have value because of the way that they work together. Ecosystem components have value by themselves (eg. a tree), but their emergent properties also have value (eg. value as a watershed). Accounting for both the value of component parts and of emergent properties can be very complicated, especially when there is non-linear interactions between addition and subtraction of component parts and the value of the emergent property(10). Another complication with evaluating natural resources is that they are often subtracted without being harvested. Natural cycles can result in fluctuations of resources, and often human activity results in unintentional degradation of the resource.

Some natural resources are public environmental goods. This would include such things as biodiversity, species preservation, and national parks. Because they are public goods they are difficult to measure. There is no specific benefactor to be factored into the economic equation. And the costs of subtractions from these public environmental goods can be spread out amoung a large number of people and become negligible.

The most difficult complication of valuing additions and subtractions to a natural resource is the difficulty in giving ecological variability a monetary value. Many human activities have little immediate effect on ecosystem functioning, but decrease the stability of ecosystems, increase the probability of deleterious catastrophic events, and reduce the ecosystems ability to recover after catastrophic events(11). Biodiverse ecosystems can better deal with change and are more likely to persist through time. A quote from Naeem and Li (1997): "Biodiversity represents a form of biological insurance". Natural systems fluctuate and infrequent catastrophic events are inevitable. We need the biological insurance of biodiversity for when disaster strikes us. Despite its importance, as of yet I have found no indication of an economic calculation for the value of this biological insurance.

The monetary value of additions and subtractions of natural resources is hard to calculate, but the monetary value of alterations in the quality of the natural environment that occur in the air, water, and soil can be even more complex. The cost in changes in environmental quality is harder to measure because the effects on humans are not well studied. Many of the effects are indirect because the pollutants damage ecosystem services that benefit humans. There are also complex non-linear interactions of pollutants. The formation of many damaging substances depends on the presence of precursor emissions, weather conditions, and the presence of other substances with which the precursor emissions react. These processes can vary on a yearly, seasonally, or even hourly basis. There are threshold effects for many pollutants, and often the effects of a pollutant can vary geographically. Because of these factors placing a monetary value on environmental pollutants can be very difficult.

Ecological fiscal reform requires whole-cost accounting and whole-cost accounting is very complex. Complications arise because of the difficulty in measuring the amount of natural capital, the difficulty in assigning this capital a monetary value, the complexity of the interactions that result in addition and subtraction to this capital. Natural systems are made more complicated to reduce to a monetary figure because of separate values of component and emergent properties, non-linear interactions resulting from the addition or subtraction of component parts, and complex natural cycles independent of human activity. Measuring the value of public environmental goods is problematic and there has yet to be any attempt to value the biological insurance of biodiversity. Because of these complications whole-cost accounting is very difficult to do with any degree of accuracy.

Because of the difficulty of whole-cost accounting, reliable non-market accounts will not be established by the private sector. Non-market accounts are simply too expensive and provide too little benefit. That means that such measurements must be left to a centralized bureaucracy. This leaves these measurements very vulnerable to changes in political climate and in available funding. The unwieldily mechanics needed for such an endeavor are inefficient and fragile. An environmentally sound economic approach simply is not robust enough to deal with the bureaucratic problems of such a mechanism.

Because of the complexity of our ecosystems and the effect of human activities upon them the construction of whole-cost accounting requires large amounts of research and resources. We do not have near the level of knowledge to complete such a momentous task. And ecological fiscal reform built around erroneous non-market accounts of our environment would be of questionable value. But we simply do not have the time to wait until we have more complete knowledge. At the present time approximately four species go extinct every hour (World Wildlife Fund, 2000). At the current rate of human caused ecological destruction we cannot afford inaction. And if we did wait there is no reason to assume that we would ever be able to construct a complete environmental economic account. The economic approach to promoting sustainable human behaviour fails because it is too complex and requires too much knowledge and resources.

The economic approach fails because it only allows for one framing process -- the rational choice framing process of maximizing material resources to that individual. Use of this framework leads to unlimited growth and maximization of resource use. But if we are to use our environment sustainably we must not use this sort of framework. It is necessary for us to look at other framing processes to determine how to use our resources. Economics has to be extended to include notions of human behaviour and not just look at maximizing resources available to each human. Environmental economic reforms to the neo-liberal system to promote sustainable resource use assume the western framing process and do not consider other methods of decision making. They add monetary values for environmental worth into the existing framework of resource maximization, but as such they do not challenge the very framework that the economic approach is built on." (http://web.uvic.ca/~stucraw/Lethbridge/MyArticles/Economics.htm)