Accounting for Renewable and Environmental Resources - Statistical Data Included

Survey of Current Business, March, 2000 by William D. Nordhaus, Edward C. Kokkenlenberg

LAST SUMMER, a blue ribbon panel of the National Academy of Sciences' National Research Council completed a congressionally mandated review of the work that the Bureau of Economic Analysis (BEA) had published on integrated economic and environmental accounts. The panel's final report commended BEA for its initial work in producing a set of sound and objective prototype accounts. The November 1999 issue of the SURVEY OF CURRENT BUSINESS contained an article by William D. Nordhaus, the Chair of the Panel, that presented an overview of the major issues and findings and a reprint of chapter 5, "Overall Appraisal of Environmental Accounting in the United States." Chapter 3, "Accounting for Subsoil Mineral Resources" was reprinted in the February 2000 issue; chapter 4, "Accounting for Renewable and Environmental Resources" is reprinted below.

This article is reprinted with permission from Nature's Numbers: Expanding the National Economic Accounts to Include the Environment. Copyright of the National Academy Press, Washington DC. This is a report of the National Research Council, prepared by the Panel on Integrated Environmental and Economic Accounting and edited by William D. Nordhaus and Edward C. Kokkenlenberg.

THE PREVIOUS chapter reviewed issues involved in extending the national accounts to include subsoil assets. This chapter focuses on two other aspects of environmental accounting: renewable and environmental resources. BEA has proposed covering these two categories of resources in future work on integrated accounting. As discussed in Chapter 1, Phase II of that work would focus on different classes of land (e.g., agriculture, forest, and recreation land), on timber, on fisheries, and on agricultural assets such as grain stocks and livestock. Phase III would address environmental resources, including, for example, air, uncultivated biological resources, and water.

The general principles set forth in Chapter 2 indicate that increasingly severe obstacles are likely to arise as the national accounts move further from the boundaries of the market economy. The discussion in this chapter confirms the premise that BEAs Phase III raises the most difficult conceptual, methodological, and data problems. This finding presents a dilemma that must be faced in expanding the accounts: Should follow-on efforts focus on those resources that can be most easily included given existing data and methods, or should BEA focus on including those resources that would have the largest impact on our understanding of the interaction between the U.S. economy and the environment? The panel's investigation, while based on data that are highly imprecise and in some cases speculative, suggests that the development of the accounts proposed for Phase III would be likely to encompass the most significant economy-environment interactions. This observation is tempered by the realization that to date nothing approaching adequate comprehensive environmental accounting for a country of the complexity of the United States has yet been undertaken. For BEA or the federal government to prepare a full set of environmental accounts would require a substantial commitment.

This chapter provides a review of the issues involved in accounting for renewable and environmental resources. It is not intended to be a comprehensive review of work in this area. Rather, it delineates the issues that are involved in environmental accounting and presents two important specific examples that illustrate these issues. The first section reviews BEAs efforts in environmental accounting to date. Next, we analyze how stocks and flows of residuals from human activities relate to natural sources of residuals, natural resource assets, stocks, flows, and economic activity. The third section examines issues involved in accounting for renewable and environmental resources. The chapter then turns to general issues associated with the physical data requirements of environmental accounting and with valuation. We next investigate in greater detail the cases of forests and air quality to illustrate how augmented accounting might actually be done. The chapter ends with the panel's conclusions and recommendations in the area of accounting for renewable and environmental resources. Appendix B identifies potentially useful sources of data for developing supplemental accounts identified by the panel in the course of its investigation.

BEA EFFORTS TO DATE IN ACCOUNTING FOR RENEWABLE AND ENVIRONMENTAL RESOURCES

This section reviews BEA's initial design for its supplemental accounts for natural-resource and environmental assets. A more complete evaluation of BEA's efforts on forests is included later in the chapter. As discussed in Chapter 2, a critical issue involved in the development of augmented accounts is setting the boundary. How far from the boundary of the marketplace should the purview of the environmental accounts extend? Table 4-1 shows BEA's tentative decisions on how it proposed to structure its supplemental accounts (BEA's Integrated Environmental and Economic Satellite Accounts [IEESA] from Bureau of Economic Analysis, 1994a: Table 1). Phase II of BEA's development of supplemental tables focused on assets listed in rows 22-35 and 42-47 of Table 4-1, while Phase III considers rows 48-55. Because BEA has not completed Phases II and III, actual decisions on what will be included have yet to be made. Each of the following sections of this chapter considers an element of how to draw the line. While an ideal set of accounts would contain "everything,' this chapter examines practical issues that arise in constructing actual accounts based on available data and tools. As will be seen, the practical is likely to fall far short of the ideal.