Natural Resource Accounting Session Objectives: l Interpret the results of natural resource accounting l Develop policies based on the results of resource accounting

Session Agenda l What is natural resource accounting l Major accounting methods l Application of natural resource accounting l Discussions

What is Natural Resource Accounting? l Estimate $ value of resource depletion & environmental degradation as a result of economic activities l Adjust economic indicators (GDP, value-added) to reflect such value l Interpret adjusted economic indicators l Publicize adjusted economic indicators l Suggest policy options

Natural Resource Accounting Steps l GDP - depreciation of produced capital = NDP l NDP - natural resource depletion = EDP1 l EDP1 - environmental degradation = EDP2 l EDP2 = environmentally adjusted NDP

User- Cost Method l Split the annual net profits generated through sale of a resource into 2 parts: true income and user cost l True income can all be consumed l User cost is estimated in such a way that if it is invested, the annual revenue from the investment together with any true income from the resource in each year will generate a constant stream of true income annually, indefinitely R - X = R/(1+r) T+1 R = net profits X = true income r = discount rate T = life time of a exhaustible resource

Net Price Method l Estimate the total net values of a resource stock at the beginning and end of the year l The difference is the value of environmental loss V t = (p t -c t )Q = N t Q V t = value of a resource at the beginning of period t p t = market value per unit of the resource c t = per unit production cost N t = net price

Maintenance Cost Method l Costs that would have had to be incurred during the accounting period in order to avoid current and future environmental deterioration from the impacts caused during the same period. l Choose avoidance, prevention, or restoration activities based on available knowledge and technologies and according to cost-efficient principle. l Calculate the costs of the chosen activities.

Policy Application 1 Assess macroeconomic performance l EDP measures genuine net value created by an economy l Given GDP-K1-K2=EDP, for EDP to grow: –No further increase of K1 and K2 while GDP grows; –Reduction of K1 and K2 even if GDP stays the same; –Increase of K2 is at least compensated for by reduction of K1; or –GDP growth must exceed the rate of increase in K1 and K2.

Policy Application 2 Reform economic policies l Have resource users pay for user cost or net price and invest the proceeds for ensuring a constant stream of income. l Have users pay for maintenance costs and invest the proceeds for maintaining those functions. l Restructure industrial policies according to relative importance of industries as revealed by sectoral EDPs. l Prevent currency overvaluation and Dutch Disease by correcting the under-pricing of exportable resources

Policy Application 3 Evaluating effects of SD policies l Environmental impacts over time: (NDP - EDP)/NDP l Living off natural assets: C/NDP vs. C/EDP –C = consumption l Environmental investment: ECF/EDP –ECF = environmentally adjusted net capital formation l Genuine capital productivity: EDP/CAP –CAP = total capital stock

Caveats l NRA does not include all economic values of natural resources and environmental functions l NRA does not address the question of environmental irreversibility l The use of NRA must be complemented by environmental and social indicators