The New Accounting Taking Better Stock of the Environment

Although looking at natural resources in terms of dollars and cents may call to mind greed-mongering capitalists lighting cigars with hundred-dollar bills, in reality a failure to account for the financial value of a nation’s natural resources and environmental services unwittingly promotes taking the environment for granted and retards the development of poor nations.

The negative effects of converting natural resources into capital are reflected in so-called “green accounting.” © Digital Vision/Getty

According to Kirk Hamilton, lead environmental economist at the World Bank and co-author of the report Where is the Wealth of Nations?, “green accounting” reached a milestone in 2003 after the United Nations issued formal recommendations for countries to adapt environmental principles into their Standard National Accounts. “We are trying to fill in some of the items that aren’t in regular national accounts,” Hamilton explains. “If governments don’t have relevant information on the environment, they may have a very distorted picture.”

Hamilton points to the example of a country in which mineral or oil extraction is a large part of the economy. The powers that be might be saving 20 percent of what’s being produced for future economic growth. But environmental accounting suggests that once you account for the depletion of the natural resources and wear and tear on produced capital goods such as buildings and machinery, the rate of creation of new wealth in net terms might be negative. There can be a huge gap between the apparent rate of wealth creation and the true wealth creation, particularly in developing nations.

Green accounting begins by itemizing both produced and natural resources, and valuing them in monetary terms. Environmental services are counted too, such as carbon sequestration by forests, recreational activities from clean water, and robust fisheries due to good harvesting practices. Depreciation, depletion and degradation count as minuses on the environmental economics balance sheet, while remediation and discoveries count as pluses. “One of the primary reasons for doing environmental accounting is to provide indicators of sustainable development,” Hamilton says.

Many countries have expressed support for green accounting, with the notable exception of America. A spokesperson for the U.S. Bureau of Economic Analysis explains, “We don’t do that kind of accounting. It may be unfortunate, but Congress doesn’t give us money to do it.”

A comment in the April 1994 Survey of Current Business, the monthly journal of the Bureau of Economic Analysis, may hint at the reason behind Congress’s failure to adopt green accounting: “There is an expectation that such accounts will show that U.S. economic growth as currently measured is not sustainable, because the stocks of natural and environmental resources that ultimately determine economic growth are unsustainable.” Wouldn’t it be nice to know for sure?