Accounting for Renewable and Environmental Resources - Statistical Data Included

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

However, some special conceptual difficulties arise in measuring stocks of natural assets. Natural-resource assets (like a physical plant or piece of equipment) are complex systems of component parts that have value because of the way they work together. Since produced capital assets are generally purchased or constructed as modules, they can be valued on the basis of their own market prices, rather than their synergistic contribution to output. To take an analogy, a baseball player's contribution to the team is a complex function not only of hitting, pitching, and fielding, but also of temperament, teamwork, and verbal abilities; from an accounting perspective, however, the economic contribution is simply wages and other compensation. For environmental assets, determining the value will become difficult when the effort extends beyond the market boundary. Consider a forest. How can the value of the stumpage in the forest be separated from the forest's contribution to erosion control, air quality, and biodiversity?

Even when markets produce evidence of the value of a bundle of assets--the composite value of soils, timber, nearness to water, and recreation--it may be difficult to separate out the values of the different components without applying complicated statistical procedures. Sometimes, the separation is misleading, as when the value of the components depends on their being together. An assembled bicycle is different from a pile of parts; similarly, forests, lakes, rivers, farmland, and coastal estuaries are valuable because of the way they are assembled.

One possible way of avoiding this difficulty is to redefine assets in terms of particular functions or characteristics, an approach similar to that taken in hedonic valuation, whereby goods are viewed as packages of characteristics. This approach would be similar to redefining an automobile as a combination of transportation mode, public-health menace, and status symbol. Under this approach, an asset is valued in terms of the sum of the values of its various characteristics. In this view, there is little point in trying to analyze the total value of holistic assets such as land or air or climate; rather, one undertakes the more modest task of looking at the different functions involved.(2) BEA's treatment of soil erosion is consistent with this approach; agricultural land is treated as the asset and the soil depth and organic-matter content as characteristics of the land. Other aspects of land quality--local climate or ambient level of pollution--can be considered in a similar manner. Identification of the economic effects of erosion on the value of land makes the resource link explicit.

Thus, a potentially useful alternative to considering the holistic value of assets is to consider how changes in air quality affect the value of agricultural land, forests, residential property, and human capital. Thus, fundamental nonhuman assets might include forests, lakes, rivers, estuaries, coastal regions, wetlands, farmland, and residential property. This approach has two further attractive features: it allows better integration with existing accounts, since some of these assets (such as residential property and forests) have an extensive existing database; and it allows incremental development of a set of valuations, building upon those in the market sector.