Environmental and Natural Resource Economics 2nd ed. Jonathan M. Harris Updates for 2011 Chapter 8: National Income and Environmental Accounting Copyright © 2011 Jonathan M. Harris

Figure 8.1: Adjusting GDP for Natural Resource Depreciation Capital depreciation is subtracted from GDP to get Net National Product. But the standard measure of depreciation applies only to manufactured capital. It makes sense to apply a similar measure to natural capital and resource depreciation to get a measure of Adjusted Net national Product (NNP*). The effect of doing so, as shown by these early studies of Indonesia and Costa Rica, is to lower perceived growth rates of national product (occasional increases in NDP* can be due to natural resource discoveries or price increases).

Figure 8.2: Adjusting Investment for Natural Resource Depreciation Applying the same adjustment to gross domestic investment gives a measure of adjusted net investment (NDI*) which is significantly lower than ordinary investment measures, and may go below zero. If adjusted net investment falls below zero, it indicates that the national wealth of a country, including both natural and manufactured capital stock, is decreasing – a sort of backward development.

Figure 8.3: Genuine National Saving The World Bank has applied the concept of natural resource depreciation to derive a measure of Genuine National Saving, which adjusts a country’s investment figure to take account of both natural and manufactured capital depreciation, along with net foreign borrowing. Regional calculations of Genuine Saving indicated that while some fast-growing areas such as East Asia have healthy net savings, areas such as Latin America and Sub-Saharan Africa have struggled, with Sub-Saharan Africa falling well below zero in net savings. (The Middle East also falls below zero, due to large oil exports which are not sufficiently balanced by domestic investment).

Figure 8.3 update: Recent World Bank Data on Adjusted Net Saving The World Bank has continued to track genuine saving, now called Adjusted Net Saving. The figures have been adjusted upward in some cases with revised methodology, but Sub-Saharan Africa, the Middle East, and Central Asia still have weak records. Source: The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium (World Bank, 2011)

Figure 8.4: Alternative Measures of U.S. Economic Welfare Efforts to adjust national income figures in developed nations include natural resource depreciation, but also cover a wide range of other factors, including inequality, pollution, carbon emissions, and “defensive” expenditures such as security and environmental cleanup costs. The resulting “Genuine Progress Indicator” (GPI) shows an increase similar to GDP in the period 1950-1970, but after 1970 the GPI flattens out as factors such as long-term resource loss and carbon accumulations rise significantly, offsetting consumption growth.

Figure 8-4 Supplement: Components of the Genuine Progress Indicator The Genuine Progress Indicator includes some categories that are left out of standard GDP, such as housework and volunteer work. It adjusts consumption for inequality, and deducts a wide range of figures for different types of pollution, resource depletion and degradation, and accumulation of wastes. The resulting final figure is significantly lower than GDP. Source: Talberth, Cobb, and Slattery, The Genuine Progress Indicator 2006 (Redefining Progress, 2006), cited in Talberth, “A New Bottom Line for Progress”, Worldwatch Institute State of the World 2008)

Figure 8.5: Genuine Saving Including Education Addition of educational investment to the Genuine Saving measure significantly increases overall total savings. The significance of education is particularly significant for low-income nations, indicating the importance of investment in human capital. Various other measures, such as the U.N. Development Program’s Human Development Index, attempt to capture other measures of social well-being such as health and life expectancy. There are now a range of alternative social and environmental indicators produced by various organizations.

Chapter 8 Supplement: Ecological Footprints of Nations Yet another approach to measuring environmental impacts is the Ecological Footprint. This measures the area required to supply food, forest products, fish, and provide living space and carbon absorption capacity for the residents of a particular country. The footprint is compared to the available biological capacity of the planet (green line), here shown in hectares per person. Total demands exceed available biological capacity by a wide margin. Source: The Living Planet Report (WWF and Global Footprint Network, 2010). Vertical axis is biologically productive hectares per capita.

Chapter 8 Supplement: Living Planet Index and Ecological Footprint The “Living Planet Index” and the Global Ecological Footprint measure human impacts in terms of species populations and biosphere resource demand, respectively. While species numbers are declining, the planetary ecological footprint exceeded biocapacity in the mid 1970s and has continued to increase. Source: The Living Planet Report (WWF and Global Footprint Network, 2010)

Chapter 8 Supplement: Ecological Footprints of Low, Middle, and High Income Countries The ecological footprints of low and middle income nations are roughly within biocapacity. The planetary ecological overshoot derives from the ecological footprints of affluent countries, which are about 3 times biocapacity. The major factor in this excessive resource demand is carbon emissions (here measured as the area of forest that would theoretically be required to absorb current carbon emissions -- well above planetary capacity. Source: The Living Planet Report (WWF and Global Footprint Network, 2010)