Introduction

The first environmental accounts were evolved by Norway in the 1970s and thereafter many other countries developed their own frameworks and methodologies to represent their environmental priorities. Since the early 1990s, the conceptual and technical aspects of Environment Accounting (EA) though have received great deal of attention, however, much less is known about how EA is being used for policy making. Two major outputs that EA provides to the policy makers are:

• indicators and descriptive statistics to monitor the interaction between the environment and economy, and progress toward meeting environment goals; and
• a database for strategic planning and policy analysis to identify more sustainable development paths; and the appropriate policy instruments for achieving these paths.

The countries having most extensive experience with policy use are European countries, Australia, Canada and a relatively few developing countries such as the Philippines, Botswana, and Namibia. There are other one-time or academic studies made by countries like Colombia, Indonesia and South Africa.

The report prepared by the World Bank on "Policy Applications of Environmental Accounting" has made a review of policy applications of EA and intend to serve as a guide for countries implementing EA by showing how EA can support policy decision-making. The methodologies adopted in the report relate to the System of Environmental and Economic Accounts (SEEA), the handbook for EA developed by the United Nations, Eurostat, OECD, World Bank, and other agencies (UN,1993, currently under revision). The report categorized EA in the following four components:

1. Natural resource asset accounts, which deal mainly with stocks of natural resources and focus on revising Balance Sheets of the System of National Accounts (SNA).
   
   
2. Pollutant and material (energy and resources) flow accounts, which provide information at the industry level about the use of energy and materials as inputs to production and final demand, and the generation of pollutants and solid waste. These accounts are linked to Supply and Use Tables of the SNA, which are used to construct input-output (IO) tables.
   
   
3. Environmental production and resource management expenditures, which identifies expenditures in conventional SNA incurred by industry, government and households to protect the environment or manage resources.
   
   
4. Environmentally-adjusted macroeconomic aggregates, which include indications of sustainability, such as environmentally adjusted Net Domestic Product (eaNDP).

Asset Accounts

Natural resource asset accounts follow the structure of asset accounts of the "System of National Accounts" (SNA), with data for opening stocks, closing stocks, and changes during the year. The changes that occur during the period are divided into those that are due to economic activity (e.g extraction of minerals or harvesting of forests), and those that are due to natural processes (e.g. growth, births and deaths) and other factors. There are two methods to value assets: net present value (NPV) and net price. The NPV method, that is, the discounted sum of its future income stream, is the theoretically correct method for asset valuation, and it has been recommended by the revised SEEA. The income stream is calculated as the net price, which is the asset price minus the marginal cost of extraction. In practice, net price is often calculated as price minus the average costs of extraction because information about marginal costs are unavailable, often leading to an upward bias in NPV.

In the early work on environmental accounting, the net price method was used to value assets rather than NPV. However, in the more recent work NPV method has come to be more widely used than the net price method. The only significant exception has been the work on forest assets by Eurostat, which used several methods, including variation of NPV and net price. NPV is used by Eurostat for valuation of subsoil assets.

Depletion and Depreciation

One of the major motivations for the preparation of asset accounts has been to account for depletion of natural resources. This is particularly important for resource rich countries which may appear to perform well according to conventional economic indicators, but in fact are living off their (natural) capital in a manner that cannot be sustained indefinitely. The cost of depletion was initially measured as the value (net price) of extraction of non-renewable and for renewable resources, the value of the volume of harvest above sustainable yield.

Regarding depreciation, several alternative ways to measure this cost have been proposed and no consensus yet has been reached. As a result of the uncertainty over measurement of depreciation of natural capital, most countries do not measure it.

Pollution and Material Flow Accounts

Pollution and material (including energy and resource) flow accounts track the use of material and energy and the generation of pollution by each industry and final demand sector. The flows are linked through the use of a common industrial and commodity classification to IO tables and Social Accounting Matrices (SAMs), as exemplified by the Dutch NAME A framework, which has been adopted by Eurostat and the revised SEEA manual. Much of the work on environmental accounts has been pioneered by industrialised countries and reflect their major policy concerns.

Physical Accounts-The most widely available accounts are used for energy and air emissions, especially emissions linked to the use of fossil fuels. Transboundary flows of atmospheric pollutants that cause acid rain have been a major policy concern throughout Europe for more than two decades. Accounts are also constructed for other air pollutants, water pollutants, solid waste, and other forms of environmental degradation, such as soil erosion. In a number of countries, especially water-scarce countries, water accounts are a high priority (Australia, France, Spain, Chile, Maldova, Namibia, and Botswana).

Monetary Accounts for Environmental Degradation- In many countries, assigning an economic value to environmental benefits and damage may be considered the most effective way to influence policy. Most countries attempt some valuation using one (or sometimes both, for comparison) of the following two different approaches to valuation:

• Maintenance, or avoidance, cost approach, which measures the cost of measures to reduce pollution to a given standard.
• Damage cost approach, which measures the actual damage caused by pollution, in terms of, for example, reduced agricultural productivity due to soil erosion, increased corrosion of structures from acid rain, or damage to human health from water pollution.

Monetary accounts for non-marketed resources valuation issues discussed in SEEA have largely focused on environmental degradation, but other non-market goods and services also need to be valued. The use of near-market goods like non- market firewood or wild food products are, in principle, included in the SNA, and many countries have included some estimate of these resources in the conventional national accounts. Water, on the other hand, is an example of an economically important resource that is not related to its true economic value. Water valuation can be quite difficult and even in the revised SEEA, little guidance has been offered.

Environmental Protection and Resource Management Account

The purpose of environment protection and resource management accounts is to make these expenditures more explicit, and thus, more useful for policy analysis. This set of accounts has three quite distinct components:

• Expenditures for environmental protection and resource management, by public and private sectors.
• The activities of industries that provide environmental protection services.
• Environmental and resource taxes/subsidies.

The United States pioneered the collection of environmental protection expenditure (EPE) data in 1972, but has curtailed this data collection effort in the mid-1990s. The European Union (European System for Environmental Expenditure Information or SERIEE) and the OECD (Pollution Abatement and Control Expenditure System, or PACE) have compiled environmental protection expenditure accounts throughout the 1990s. These data are generally obtained from industry survey.

Macroeconomic Indicators

The three sets of account described above, each provide a range of indicators, but, with the exception of asset accounts, these indicators do not directly affect the conventional macroeconomical indicators, such as GDP and NDP.

There are two major environmental macroeconomic indicators, i.e, physical indicators and monetary indicators.

Physical Indicators- Macroeconomic indicators measured in physical unit have been proposed either as an alternative to monetary indicators, or to be used in conjunction with monetary aggregates in assessing economic performance. Physical indicators reflect a strong sustainability approach. The two major sources of physical macroeconomic indicators are the NAMEA component of the SEEA flow accounts and Material Flow Accounts, which are closely related to environmental accounts.

The NAMEA provides physical macroeconomic indicators for major environmental policy themes: climate change, acidification of the atmosphere, eutrophication of water bodies, and solid waste. The Material Flow Account (MFA) provide several macro indicators but the most widely known is total material requirements (TMR). TMR sums all the material use in an economy by weight, including so called "hidden flows", which consist of materials excavated or disturbed along with desired material, but which do not themselves enter the economy.

Monetary Indicators- The purpose of most monetary environmental macroeconomic aggregates has been to provide a more accurate measure of sustainable income. The first approach revised conventional macroeconomic indicators by adding and subtracting the relevant environmental components from the SEEA, the depletion of natural capital (daNDP) and environmental degradation (eaNDP). The adjustment of NDP for asset depletion (da NDP) is accepted in principle by most economists and statisticians, even though there is not yet a consensus over the correct way to measure it.

The criticism of eaNDP led to the construction of a second approach to constructing indicators, which asked the question, what would GDP or NDP have been if the economy were required to meet sustainability standards. These indicators of a hypothetical economy are derived through economic modeling. Two modeling approaches were developed:

• Hueting's "Sustainable National Income" (SNI), which estimates what the level national income would be if the economy met all environmental standards using currently-available technology.
• geNDP which estimates how the economy would respond if the estimated maintenance costs were internalized in the economy.

Identifying a sustainable national income (SNI) is a highly complex undertaking. It requires economic modeling that includes assumptions about the environmental standards to achieve, the technological means to achieve them, the response to policy instruments, and the usual range of assumptions for an economic model: income and price elasticities, impact on trade etc. Because of this complexity no studies have produced indicators that are comparable across countries.

Conclusions

It may be concluded that the use of environmental accounts has been mostly in industrialized countries, especially Europe, Australia, and Canada. The "Asset Accounts" are compiled by most countries, but not used very much in assessing sustainability. The 'physical flow accounts for pollution and material accounts" are widely used, both for construction of indicators and as inputs to policy modeling. The construction of monetary environmental macro indicators is quite limited, and it is not clear that these indicators have been used.

In addition, there are four main observations regarding how useful environmental accounts are for policy decisions:

1. Although some countries are using the environmental accounts quite actively, the accounts are still underutilized especially in developing countries.
2. No country has truly comprehensive environmental accounts.
3. International comparisons are important, but yet not possible because of differences in methodology, coverage, environmental standards, and other factors.
4. For a country to fully assess its environmental impact, it must have:
   
   • Accounts for the transboundary movement into and out of the country pollutants via air and water.
   • Accounts for its major trading partners to calculate the pollution and material content of products that it imports.

The feature is based on a paper written by Glenn-Marie Lange under the Environmental Economics Series of the World Bank, titled "Policy Applications of Environmental Accounting."