1. 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

2. 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 SOERhttp://www.epa.gov/roe 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. http://www.defra.gov.uk/environment/statistics ‘Environmental accounting’ – monetary, sometimes biophysical, data organised around economic categories

3. 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=K α R β 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.

4. 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.

5. A resource owner in a competitive economy 1 B is the size of the bank account, units £s C is consumption expenditure, units £s W is total wealth, units £s R is the total of permit sales, units tonnes X is the size of the remaining stock of mineral, units tonnes h is the price of a permit, £s per tonne V is the value of the mine, units £s i is the interest rate, assumed constant over time B t – B t–1 = iB t–1 + (1 + i)h t–1 R t–1 – C t (19.2) V t = h t (X t–1 – R t–1 ) (19.3) h t = (1 + i)h t–1 so V t = (1 + i)(V t–1 – h t–1 R t–1 ) (19.4) or V t – V t–1 = iV t–1 – (1 + i)h t–1 R t–1 (19.5) Then (19.2) and (19.5) in W t – W t–1 = (B t – B t–1 ) + (V t – V t–1 )(19.6) gives W t – W t–1 = iW t–1 – C t (19.8) where W t = W t-1 implies C t = iW t–1 (19.9) and C t = iW 0 (19.10) is the maximum constant consumption stream

6. A resource owner in a competitive economy 2 B is the size of the bank account, units £s C is consumption expenditure, units £s W is total wealth, units £s R is the total of permit sales, units tonnes X is the size of the remaining stock of mineral, units tonnes h is the price of a permit, £s per tonne V is the value of the mine, units £s i is the interest rate, assumed constant over time Given that PV of x forever is x/i C t = iW 0 (19.10) forever gives W* = W 0 (19.11) Income is Y t = iB t–1 + (1 + i)h t–1 R t–1 (19.12) For W t = W t-1 C t = iB t–1 + iV t–1 for which I t = Y t – C t = iB t–1 + (1 + i)h t–1 R t–1 – iB t–1 – iV t–1 = (1 + i)h t–1 R t–1 – iV t–1 (19.13) which by (19.5) is I t = –(V t – V t–1 ) (19.14) which is Hartwick’s rule.

7. A resource owner in a competitive economy 3 For sustainable income as what can be consumed without reducing wealth Y sus,t = iW t–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) U ct /U ct-1 = (1+ρ)/(1+i) so that ρ C t-1 ρ=i implies U ct =U ct-1 implies C t =C t-1 ρ>i implies U ct >U ct-1 implies C t <C t-1 given the assumption of diminishing marginal utility.

8. Figure 19.1 Optimal and sustainable consumption paths Optimal and sustainable consumption paths 1 For a representative agent closed model economy where Q t =K α t R β t : α + β = 1 and β<α C 0 t is the optimal path C S 0 is the highest feasible level of constant consumption at t =0 C S t is the time path under the optimal plan for the maximum level of constant consumption that would thereafter be sustainable indefinitely – at T, C O T is optimal and C S T is maximum sustainable consumption from T onwards, given that the optimal path was followed up to T.

9. Optimal and sustainable consumption paths 2 Figure 19.1 Optimal and sustainable consumption paths At T, having followed the optimal path, C 0 T is not sustainable. The maximum constant consumption level from T on would be C S T. 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 C S T.

10. 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 Max St is a function of current levels of the variables consumption and investment that gives a single valued measure of performance in terms of the objective function.

11. Measuring national income: theory 2 U C is the marginal utility of consumption. For a linear utility function so that U(C t ) = U C C t, and using I t for the change in the size of the capital stock, this is U C C t + U C I t a performance measure in utils. Dividing through by U C gives the performance measure NDP t = C t + I t (19.17) where NDP is Net Domestic Product, also known as NNI for Net National Income. From (19.17), NDP t – C t = I t so that C t >NDP t implies I t <0, which implies K t+1 <K t and Q t+1 <Q t. For sustainable income as the maximum that can be consumed without reducing the size of the capital stock, NDP t is sustainable income.

12. 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 EDP t = NDP t – Q Rt R t = NDP t – h t R t (19.18) where EDP stands for Environmentally Adjusted Domestic Product, Q Rt is the marginal product of the resource in production, R t the amount used, and h t the Hotelling rent. The second term on the rhs is the depreciation of the resource stock. With NDP t = C t + I t, (19.18) is EDP t = C t + I t – h t R t so that for total net investment zero, I t = h t R t, the Hartwick Rule, consumption is equal to sustainable income.

13. 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, EDP t = NDP t – (Q Rt – G Rt )(R t – N t ) = NDP t – h t (R t – N t ) (19.20) where Q Rt is the marginal product of the resource in production, G Rt is marginal extraction cost, and N t is additions to the known stock. For a model where the resource input is a renewable EDP t = NDP t – (Q Rt – G Rt )(R t – F{S t }) = NDP t – h t (R t -F{S t }) (19.21) where G Rt is the marginal cost of harvesting, F{S t } is the stock’s growth function, and S t stock size. For sustainable yield exploitation, R t = F{S t } and there is no depreciation – EDP t = NDP t

14. 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. EDP t = NDP t + (U St /U Ct )S t – h t (R t – F{S t }) (19.22) where U St is the marginal utility of standing timber and U Ct is the marginal utility of produced commodity consumption. Typically U St 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.

15. 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?

16. The UNSTAT proposals: satellite accounting 1 System of integrated Environmental and Economic Accounting, SEEA Balance Sheets and Satellite Accounts (19.23) 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 EDP t ≡ NDP t – EC t ≡ (GDP t – D Mt ) – D Nt (19.24) where D Nt ≡ EC t

17. 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.

18. 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.

19. 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 (19.27) 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 Given C rather than c, an estimate of CIV.

20. YearEl Serafy ruleNet price INet price IIABS NPV change 1988/899528511 1989/9012289872–19321– 6500 1990/91192212023–147035–19900 1991/92232813624299075–9700 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 10 6 Total of depreciations calculated for 33 minerals, using data from ABS (1995). r = 7.5%.

21. UK asset values £billion end year OilGasOil+GasNon-financial Assets Residential Buildings 199946.96430.49577.4593877.51848.9 200053.61143.01196.6224245.12106.5 200151.81250.451102.2634484.82267.8 200250.88346.56697.4495076.82737.1 200353.04544.25097.2955522.23054.9 200478.53650.754129.296069.03427.0 2005100.19265.402165.5946283.03555.0 2006120.92169.439190.366863.13915.3 2007177.89168.340246.2317380.04313.6 Table 19.4 UK asset values 1999 - 2007 Source: Office of National Statistics 2008a 2007 - oil and gas less than 5% of Non-financial Assets, less than 10% of Residential Buildings

22. Figure 19.2 Oil and gas depreciation for the UK 2000-2007 Oil and gas deprecation in the UK Derived from data on year end asset value – ONS 2008a

23. Australian asset values $billion 30th June 20022003200420052006 Total NFA 40044435.95014.85391.45876.7 Produced 2150.02291.52482.52702.12932.9 Machinery and equipment 346.9352.3361.2382.6409.3 Dwellings 812.4892.5991.61086.21172.1 Non-produced 1854.72144.32532.32689.32943.8 Land 1639.81920.42284.02417.72633.3 Subsoil 204.9213.6237.2260.2298.8 Forest 1.92.02.12.2 Table 19.5 Australian asset values 2002 - 2006 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.

24. Environmentally adjusted national income - Indonesia YearGDP Index EDP Index EDP/GDP 1971111.20 19721.090.900.99 19731.220.970.96 19741.321.481.36 19751.380.980.85 19761.471.120.92 19771.601.080.81 19781.731.190.78 19791.831.190.78 19802.011.280.76 19812.171.480.82 19822.221.580.86 19832.321.490.78 19842.441.680.83 Source: Based on Repetto et al (1989) The first attempt to do this? By the World Resources Institute, using their estimates with official GDP estimates. Depreciation for: Oil – Net Price II Timber – Net Price II allowing for growth Soil – physical loss valued using loss of agricultural output The results are dominated by changes in the price of oil, and new discoveries of oil – EDP rose by 51% 1973 to 1974

25. Environmentally adjusted national income - UK 2001200220032004200520062007 GDP 1021828107556411397461200595125250513218601401042 -FCC 115796121914125603135184138520147858158143 =NDP 90603295365010141431065411111398511740021242899 -DEPCTN -56414814154-31995-36304-24766-55871 =EDP 91167394883610139891097406115028911987681298770 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% Table 19.7 UK GDP, NDP and NDP adjusted for oil and gas depreciation 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

26. Environmentally adjusted national income - Australia 2001/22002/32003/42004/52005/6 GDP 735714781675840285896568965969 -FCC 115259121526127754134523145476 =NDP 620455660149712531762045820493 -ADJSTMNT 131786589487234 =EDP 619138659284711637761958820259 Growth rates GDP 6.7%6.2%7.5%6.7%7.7% NDP 6.6%6.4%7.9%6.9%7.7% EDP 6.5% 7.9%7.1%7.7% GDP pc 5.0%5.6%6.0%6.3% Table 19.8 Australian GDP, NDP and NDP after net depletion adjustment Source: ABS 2008. While the Australian statistical agency, ABS, does not adjust the national income estimates in its main publications, it did do that in Year Book Australia 2008. Units are millions of current AUS$. FCC – Fixed Capital Consumption ADJSTMNT – the ‘net depletion adjustment’ which is subsoil (fossil fuels and minerals) extraction plus land degradation less subsoil additions

27. Wealth and genuine saving 1 EDP t = C t + I Rt + D Nt (19.29) So EDP t > C t for (I Rt + D Nt ) > 0 EDP t = C t for (I Rt + D Nt ) = 0 EDP t < C t for (I Rt + D Nt ) < 0 so that maximum consumption consistent with not running down the capital stock is C t = EDP t, so that EDP t is sustainable income Sustainable development requires C t ≤ EDP t (19.30) C t = EDP t implies that I Rt and D Nt are equal and of opposite sign so that (I Rt + D Nt ) = 0.

28. Wealth and genuine saving 2 With K Rt for reproducible capital and K Nt for natural capital we can write W t = K Rt + K Nt (19.31) where W stands for wealth as the aggregate capital stock. For W t+1 we can write W t+1 = (K Rt + I Rt ) + (K Nt + D Nt ) so that W t+1 - W t = I Rt + D Nt which by equation 19.29 is W t+1 - W t = EDP t - C t (19.32) so that W t+1 - W t ≥ 0 if C t ≤ EDP t. Hence, W t+1 - W t ≥ 0(19.33) is equivalent to the expression 19.30 as a test for sustainable development. W t+1 - W t is what is now widely known as 'genuine saving' or 'genuine investment' for period t.

29. 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 (19.35) A consumption stream beginning at t = 0 is said to to correspond to a sustainable development path if at t V t+1 ≥ V t, see Appendix 19.3, is equivalent to (19.36) and p it is the accounting price for asset i Is Genuine saving Is Change in asset i where

30. Theory for an imperfect economy 2 The accounting price for asset i is the change in V t 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?

31. 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.

32. Problems with genuine saving as a sustainability test 2 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 Table 19.9 Numerical example for incomplete genuine saving accounting TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 Source: Common 2007b TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR WeWe 0100110050 1300 1102100051 1204 Change2-10011 -96 TimeKRKR K1NK1N K1SK1S K1HK1H K0NK0N K0SK0S K0HK0H W 01001000100 500100 2000 1102950101 5501101202034 Change2-501150102034 KRKR KeNKeN KeSKeS KeHKeH WeWe 0100110050 1300 1102100051 1204 Change2-10011-96 Table 19.9 Numerical example for incomplete genuine saving accounting Actual genuine saving is 34 Looking just at reproducible capital says 2 Measured genuine saving is –96 - opposite sign to actual.

33. 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 (CO 2 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.

34. World Bank - Genuine saving and income % 1970 1975 1985 1995 2004 Figure 19.3 Genuine saving by income group Vertical axis is % of GNI

35. World Bank - Genuine saving in world regions % 1974 1980 1990 2004 Figure 19.4 Genuine saving for selected regions and the world Vertical axis is % of GNI For the world, genuine saving is around 10% over 1974-2004 Middle East and Africa strongly influenced by oil and gas extraction, and price changes for such. Results here consistent with rents being consumed, rather than invested in reproducible capital.

36. World Bank – total wealth and its components Income group Produced capital Natural capital SubsoilTimberNTFRCroplandPasturelandProtected areas Total Low1174325109481143189111 1925 Middle534710891691201583407129 3496 High OECD761933825747183200815521215 9531 World1685013022521041496536322 4011 Table 19.11 Asset values for income groups and the world, $ per capita 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

37. Accounting for international trade 1 Consider 2 trading economies, 1 and 2. Let x 12 be exports from 1 to 2, and x 21 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: y 1 = x 12 + c 1 + s 1 = x 12 + f 1 (19.37) y 2 = x 21 + c 2 + s 2 = x 21 + f 2 If we define coefficients q 12 = x 12 /y 2 and q 21 = x 21 /y 1, equations 19.37 can be written as y 1 = 0 + q 12 y 2 + f 1 y 2 = q 21 y 1 + 0 + f 2 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.

38. Accounting for international trade 2 Now, let D 1 = D M1 + D N1 = d m1 y 1 + d n1 y 1 = z 1 y 1 D 2 = D M2 + D N2 = d m2 y 2 + d n2 y 2 = z 2 y 2 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 = z 1 y 1 + z 2 y 2 or, in matrix notation D = z’y(19.39) where z’ is [z 1 z 2 ]. 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:

39. 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 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, D i IN, give depreciation in i, and column sums, D i ATT, give depreciation attributable to i. Thus, in the two-country case here t 11 + t 12 is the depreciation of total capital actually taking place in country 1, while t 11 + t 21 is the depreciation of capital in the global economy that is on account of, attributable to, final demand in country 1.

40. 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 so that column sums from A, d i ATT, give depreciation in all countries attributable to per capita final demand in country i. And, B = PT = PZLF(19.42) is so that row sums from B, d i IN, give per capita depreciation in country i on account of global final demand. These depreciation measures can be compared with s i, per capita saving in i.

41. Per capita saving and depreciation by region Some entries from Table 19.11 Excesses of per capita saving over depreciation – difference from global excess (s i -d i IN ) - (s-d) US$ 19801982198419861988 W.Europe570341344522764 USA153-20038-429-401 Africa-102-68-113-140-238 Middle East-578853-1024-1135-978 s - d 17376106109220 (s i -d i ATT ) -(s-d) US$ 19801982198419861988 W.Europe440249306528754 USA48-271-141-613579 Africa-102-79-119-146-246 Middle East238-273-708-950-779 In natural capital only nonrenewables accounted for here. For the world as a whole, genuine saving positive Looking at things on the attributable basis does not much alter the general picture Africa’s contribution always negative Mid East usually negative Takes no account of ability to save – income levels.

42. 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)

43. 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

44. GDP and GPI compared 19741950 2004 Figure 19.5 GPI per capita and GDP per capita for the USA 1950-2004 GDPpc GPIpc Source: Talberth et al 2007 Despite differences in the adjustments made to personal consumption across ISEW/GPI exercises, results generally similar: For every society there seems to be a period in which economic growth brings about an improvement in the quality of life, but only up to a point – the threshold point – beyond which if there is more economic growth, quality of life may begin to deteriorate. (Max-Neef 1995) Sensitivity analysis (Neumayer 2000) suggests that if here is a threshold, it is not due to movements in the environmental components of the index. Results do appear to be sensitive to assumptions about unpaid labour.

45. The economy and the environment again: what the economy does Environment Economy Satisfactions Extractions Insertions Figure 19.6 What the economy does The economy extracts materials and energy from the environment, using them along with capital and labour to produce the means to the satisfaction of human needs and wants, and inserts back into the environment an equal mass of waste (Chapter 2) Common (2007a) suggests that a natural measure of economic performance would be E = S/I with E for efficiency S for satisfaction I for (environmental) input

46. 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

47. Performance converting environmental impact into satisfaction Table 19.15 Highest and lowest E scores E CE – commercial energy. E TE – total energy. E F – ecological footprint. E G1 – greenhouse gas emissions including land use changes E G2 – greenhouse gas emissions excluding land use changes 1 toe for tonnes oil equivalent. 2 all ghgs converted to heating equivalent CO 2

48. 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 where Country i experienced sustainable development if E i,t+1 >E i,t and GHG i,t ≤GHG* i and GHG i,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 E i,t+1 >E i,t and F it ≤F* i and F i,t+1 ≤F* i If, that is, E increased and footprint stayed within equitable allowance.