UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
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This interest in environmental accounting led EPA to begin an environmental
accounting study focused on the Chesapeake Bay region. Prior to initiating the effort, it
was felt that sufficient data were available to support a reasonable application of
accounting methods. For this study, a "Nature" sector was added to the traditional
sectors (industry, government, and household), and additional accounting entries,
reflecting environmental services, environmental damages, and environmental deprecia-
tion, were used with conventional accounting entries in a double entry account system.
The Charge (enclosed) to the Environmental Economics Advisory Committee (EEAC)
for this review was developed by the OPPE and encompassed six major conceptual
issues based on the Cheasapeaka study, with each issue including a variety of
sub-issues—some highly specific and technical, others more broad and generic in
nature.
The Committee met on April 15, 1992 to examine the draft Cheasapeaka report
(along with selected background materials) and participate in a briefing by the OPPE
staff. Based on that process, the Committee felt that the issues raised in the Charge
were too extensive to be addressed within a single application of environmental
accounting. Moreover, the available documentation did not provide specific details on
important conceptual and empirical aspects of the implementation. Some of the most
important shortcomings include:
» No evidence of a comparative evaluation of the implications of how
ecological linkages in the Chesapeake Bay area were represented in the
case study,
* Failure to distinguish between consumer surplus estimates for discrete
changes in the specific aspects of the environmental resources in the Bay
region and the marginal value of the incremental changes in these mea-
sures.
• Double counting of the values generated by the services of environmental
resources when they contributed to several different types of economic
activities. This arises because the models used to estimate these values
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reflect multiple contributions simultaneously and do not allow the parts to
be separated.
» No examination of sensitivity in results to important assumptions inherent
in the depreciation methods selected to reflect losses in natural and envi-
ronmental resources as services that support economic activities.
The Committee felt that addressing these and other specific questions in the
context of refining the Cheasapeaka application would be a major undertaking that was
not warranted because of the preliminary nature of this pilot study and the limited
contribution such refinements could make, given the information base, to the likely
long-term role of environmental accounting in EPA's activities. After discussions with
the OPPE staff, the Committee decided that the most useful course of action would be
to frame this report in terms of broad comments on the topic of environmental account-
ing per se, rather than address the specific considerations raised in the Cheasapeaka
report and the associated Charge.
The Committee's comments follow:
a. Environmental accounting seeks to incorporate the amounts of natural and
environmental resources used as inputs or provided as outputs into the
measurement of the product accounts. Economists generally have used
one of two approaches. The first (and in some respects the most direct)
involves trying to remove resource depletion from GNP by using market
prices and the amounts extracted (e.g., forest harvested, mineral deposits
used, etc.) as measures of the loss of natural capital. This treatment
would be analogous to adjustments for depreciation with other forms of
produced capital in that a reduced stock of natural resources would
reduce the ability to produce aggregate income in the future. The second
approach tries to attach monetary values to all natural and environmental
resources, regardless of whether or not prices are available for them, and
then includes these implicit values as indicators of the contributions they
make to full income or full input costs.
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The United Nations has shown increasing interest in including natural
resources under the first approach or as "satellite" accounts measured in
physical terms. For marketed natural resources, a monetary measure is
usually preferable to a physical measure for these purposes.
b. EPA should maintain a capability In environmental accounting so the
Agency would be able to learn about and contribute to activities at both
the United Nations and the U.S. Bureau of Economic Analysis on these
issues. While maintaining capability in this area is important, EPA needs
to clarify the purposes to be served by environmental accounting. Para-
graph (a) of this report highlights two approaches with differing aims,
embodying different conceptual and empirical problems. More consensus
exists on the viability of expanding national income accounting to reflect
depreciation in natural capital than to value environmental quality and
natural resource amenities. If environmental accounting is envisioned as
a tool to measure welfare effects (i.e. the changes in the value of resource
stocks or environmental amenities), research needs to address the con-
nection between welfare analysis, which measures social values, and
national income accounting, which measures economic activity. In the
meantime, it is important to recognize that environmental accounting
systems as currently constructed do not provide consistent measures of
welfare, and therefore do not provide useful guides to the desirability of
various policy changes. Additional research might also compare current
approaches with other methods for trying to take nature into account in
national income accounting,
c. Chesapeakea is a pilot study that explores the potential of environmental
accounting, and the difficulties inherent in attempting to implement (the
constituent elements for) such accounting systems. The study is at an
early stage and seems to be providing useful insights into both the value
and limitations of this approach,
d. The Committee thinks that research in this general area should be contin-
ued as a means of learning more about environmental accounting, but that
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it should not serve as a template for a series of such studies in other
geographic areas. The methodology has not yet been sufficiently devel-
oped to serve as a guide for future efforts. Rather, it should continue to
be used to stimulate further thought about fundamental conceptual and
measurement issues which only percolate to the surface in the context of
specific studies.
We look forward to receiving your response to our comments.
Dr. ftaymond Loehr, Chairman
Science Advisory Board
Dr. Allen Kneese, Co-Chair Dr. V.
EEAC EEAC
ENCLOSURES
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QUESTIONS FOR ECONOMICS SUBCOMMITTEE OF
THE SCIENCE ADVISORY BOARD
ENVIRONMENTAL ACCOUNTING
Primary Issues
Issue #7: Valuation
The Chesapeake Bay case study focused on non-market aspects of the environment
(e.g., recreational fishing, camping, beach use). Consumer surplus measures were used,
where possible, to value the final consumption services and damages that currently flow
from the environment to households. Costs ofpolution reduction from current levels were
used to value waste disposal services. Other environments! accounting systems focos on
the marketable services of the environment (e.g., sub-soil deposits, forests, fisheries), costs
to attain specific srartdards or restore environmental quality, or on identifying and
reclassifying current expenditures for pollution abatement
Implementation of the accounts with actual data required the use of existing data,
With the exception of water, damige estimates specifically associated with environmental
quality changes in the Chesapeake Bay were unavailable. Instead, dollar estimates of the
damages per tan of pollutant removed, based on national and/or regional studies, were
used. Recreation values from geographic locations that encompassed or were located close
to the Bay were used whenever possible. However, it was necessary in some cases :o
transfer values from other geographic locations. Finally, it was necessary to use average
dollar per ton estimates for effluent removal to calculate waste disposal services.
Conceptual Issues:
Should environmental accounting entries be made consistent with the
marginal valuation basis (price times quantity) underlying conventional
accounting or should welfare-type (consumer surplus) measures be used?
Should some measure of costs (e.g. restoration costs) be osed to value
environmental damages or should benefit measures continue to be
developed and used?
Should the focus continue Co be on nonmarketed, human uses of the
environment, on more folly accounting for the role of natural resources in
economic production, or on some oiier aspect of die environment, for
exajitple, ecosystem values, values for habitat, values for biodiversity, etc.?
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Irotflemeatatlon Issues:
« For which situations it appropriate to transfer benefit estimates from, one
study to inofter and what procedures should be followed in performing the
transfer?
* Is the use of an avenge cost estimate for marginal costs appropriate?
» Given the nonlinearines of certain atmospheric processes (e.g.» ozone
formation), Is the use of dollar per ton damage estimate appropriate?
• How should effects be described when economic values are not available?
Issue #2: Modeling
An important feature of environmental accounting is the ability to link economic
activities and the environment. With regard to the Bay, given the present state of linkage
dam,, the development of data for the accounts would require not only an extensive data
collection effort, bat also a large body of new scientific research and a redirection, of
rrrach of the current Bay scientific and modeling efforts. The case study shows that the
data needed to establish the linkages between human activities and the environment and
between the environment and human activities often do not exist. For example, it was cot
possible to determine the impact of reductions in human generated nutrients on Bay water
quality separately from natural fluctuations in nutrient loads. Similarly, the impact of Bay
water Quality changes on participation in recreational activities could not be determined.
As a result it was necessary to infer accounting information in the absence of new
and existing data. In the case of water, it was assumed that a 20 percent reduction in
effluent from the 1982 baseline would result in a 20 percent improvement in water quality
and thai rMs improvement would result in waicr quality that was acceptable. Eartieipation
rates and recreational values were assumed to be unchanged over this time-period. Air
pollution redaction targets were based on national redactions that had occurred by 1990
(NGZ from mobile sources) or that were mandated mder the Clean Air Act Amendments
of 1990 (all VOC sources, SO, and NO, point sources). Costs for air and water poHori
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Conceptual Issues:
" Is it necessary to explicitly model such linkages or will the development
of parallel systems (i.e., economic and environmental) suffice?
* What criteria should be established to determine when modeling is
required?
« Can the accounts serve the function of coordinating future scientific
research and data development?
* 1$ it appropriate to value environmental and economic interactions when
they are not explicitly modeled1?
« When explicit models are not used, how should the resoles be
characterized?
, • What priority should be given to maintaining consistency in basic data?
ImplemeplatioiiJssiies;.
* Were the following assumptions that were required by the analysis
appropriate?
• A 20 percent reduction in nutrient loads would result in a 20
percent improvement in water quality (ie., setting the water target)
A 20 percent improvement in water quality would result in
acceptable water quality (ie, assigning a damage estimate)
* That emission target reductions and costs are the sairfe as for the
U.S. is a whole
* Constant costs per ion of effluent or emissions induced
* Constant damages per ton of emissions reduced
» The use of population to scale water damages
• The use of population to scale state estimates of participants in
recreational activities and to develop time nrends
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Participation rates and values are not affected by changes in the
level of Bay water and air quality
How should the substantial differences in air and water databases be
accounted for? - ' . •
; Coverage and Reliability
In an ideal wodd Acre would be two principal activities required to iniplemeni a
sec of credible accounts for tbe Chesapeake Bay: (1) developing new and existing daia
aid (2) transforming new md existing dam into a foim required by the accounting
framework. In the real world, a third activity must be added: (3) inferring; accouniiif
information in the absence of new and existing data. The more the program can support
type-(l) activities as opposed to type-(3) activities, the higher the quality of the final
product However, this increase in quality comes at a high cost
The. Bay lias been the subject of considerable research over the past few years.
Therefore, it was felt that the existence of available data would permit a reasonably low
cost application of accounting methods. Since many environmental problems are local in
nature, it was felt thai examining a regional entity defined by environmental imperatives
would allow better coverage of environmental problems. However, the accounting exercise
in the Chesapeake Bay region revealed that the data are not as complete or as refined as
one might hope for. Further, data on several environmental problems/issues, such as solid
waste, toxic contamination of sediments, biodiversity, and hibimt loss were aoc readily
attainable.
Conceptual Issues:
Does this type of poEtical tjnit and analysis represent a b^ner way to
address economic-environmeatal interactions?
Is a national scale for environmental accounting appropriate given the
heterogeneous types of services provided by the wide array of
environmental and natural resource assets in the United Stiles?
Ih the face of global environmental problems, sach as stratospheric ozone
and climate change, would a set global environmental accounts be
appropriate?
What are the standards of accuracy and reliability that should be applied
to environmental accounting?
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* How comprehensive should the accounts be in their coverage of
environmental media?
* How should attributes of the environment that are not included in the
accounts be characterized?
Implementation Issues:
» Should, sensitivity results be included?
» Should i rating of the quality of various estimates be included?
* Are the results sufficiently reliable that they can be used to guide policy?
Secondary Issues
Issue #4; Accounting framework
There are m number of strategies that have been suggested for introducing
enviionrnratal and natural resources inio conventional economic accounting systems.
Following the classificttion scheme developed by Henry Peskm, these straiegies may be
classified into four groups: (1) cost accounting, (2) physical accounting, (3) depreciation
accounting, and (4) input-output accounting, la general, cost accounting involves die
assembly of data describing expendirures'to abate pollution. Physical accounting can refer
to either an accounting of the physical change in environmental and natural resources
(e.g.» change in natural resource stock from its opening balance to its closing balance),
or an accounting of the generation and deposition of specific poEuttnts. Depreciation
accounting measures changes in the value of the stock of nttural resources. Input-output
accounting combines a physical accounting of pollution generation and consumption of
natural resources by production sector with information on pollution treatment activities
taMng place within sectors.
Conceptual Issues:
• What type of framework would be appropriate for EPA to use?
* Should an environmental accounting system stay within the UN System of
National Accounts framework or should another system be adopted?
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What are the impEeatioas of the accounting systems described for
coverage of environmental problems?
Implementation Issues:
Should the accounting femework be limited, by the availability of data and
existing valuation techniques?
Can credible estimates be obtained given the data requirements of the
environmental accounting approach used for the Chesapeake Bay study?
Will the current state of the ait in nonmarket valuation support this
accounting framework?
Isfue #5. Purpose of Environmental Accounting
Conventional economic accounting serves two distinct and important roles. The
first is to provide summary measures of a nation's overall economic performance (e.f.,
GDP). ITae second is to provide infoimation useful for the maaigement of the economy
(e.g., relationships between inputs and outputs). Many of those interested in environmental
accounting are interested in developing a "green" or "eco* GDP- While this type of
accountins may be useful for evaluating the effectiveness of various policies, it is less
useful for planning purposes.
Conceptual. Isspgs:
• WMch role is more Important for EPA? I
• Should a "Green" or "Boo" GDP be developed?
• More generally, should such summary measures orindicaiors be developed
and what type of indicators wpald be useful?
Implementation Issues:
« How should the more di$a*fregated information be presented?
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If a greea GDP or some other summary measure is w be calculated, how
should this be done and what should be included?
Should "defensive" expenditures be reclassified as intermediate and hence
subtracted from GDP to arrive at the green GDP?
Issue #6: Economic or geologic viewpoint
Environmental accounting seeks to integrate environmental and economic
interactions into i consistent iramewoik. A key issue is whether an ccolojjie or an
economic viewpoint should be used as the basis for the accounts, especially in the
valnation of environmental and natural resource assets.
Conceptual Issues;
* Should economic concepts of scarcity or ecologic concepts (e.g.,
sustainable use) be used to value environmental and natural resource
assets?
* To what extent is it possible to substitute other fauns of capital for natural
capital?
,*
• Should the focus of the accounting effort be on the flow accounts or on
capital stock accounts? •
Implementation Issues:
• Given the time scales involved in many environmental problems, should
future streams of services be discounted and what rale shoild be ustd?
• What assumptions ibont future service flows ire appropriate? Is the
"myopic" view used in the case study appropriate?
• What assumptions about rales of substitution should be used for
environmental accounting?
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NOTICE
This report has been written as a part of the activities of the Science Advisory
Board, a public advisory group providing extramural scientific information and advice to
the Administrator and other officials of the Environmental Protection Agency, The
Board is structured to provide balanced, expert assessment of scientific matters related
to problems facing the Agency. This report has not been reviewed for approval by the
Agency and, hence, the contents of this report do not necessarily represent the views
and policies of the Environmental Protection Agency, nor of other agencies in the
Executive Branch of the Federal government, nor does mention of trade names or
commtrciai products constitute a recommendation for use.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
SCIENCE ADVISORY BOARD
ENVIRONMENTAL ECONOMICS ADVISORY COMMITTEE
CO-CHAIRS
Dr. Allen V. Kneese
Resources for the Future
1616 P SI, N.W.
Washington DC 20036
Dr. V. Kerry Smith
Department of Economics, Box 8109
North Carolina State University
201 Patterson Hall
Raleigh NC 27607
MEMBERS
Dr. Nancy E. Bockstael
Department of Agricultural
and Resource Economics
University of Maryland
College Park, MD 20742
Dr. A. Myrick Freeman
Professor, Department of Economics,
Bowdoin College,
Brunswick, ME 04011,
Dr. Charles D, Kolstad
Assoc. Professor
University of Illinois
408 S, Goodwin Avenue,
Urbana, IL 61801,
Dr. William Nordhaus
Professor, Dept, of Economics
Yale University
New Haven CT 06520
Dr. Bryan Norton
School of Public Policy
Georgia Institute of Technology
Atlanta GA 30332-0345
Dr. Wallace E. Dates
Professor, Department of Economics,
University of Maryland,
College Park, MD 20742,
Dr. Paul R. Portney
4228 N. Old Glebe Road
Arlington, VA 22207
Dr. Robert Repetto
Director, Economic Research Program
World Resources Institute,
1709 New York Ave., NW,
Washington, DC 20006.
Dr. Richard Schmalensee
Professor,
Massachusetts Institute of Technology
Room E52-456
Cambridge MA 02139-4307
Dr. Robert N. Stavins
Asst Professor of Public Policy
John.F. Kennedy School of Government,
Harvard University,
79 John F. Kennedy Street,
Cambridge, MA 02138.
Dr. Thomas H. Tietenberg
Professor, Dept. of Economics,
Colby College,
Waterville, ME 04901
Dr. W. Kip Viscusl
Professor, Department of Economics,
Duke University,
Durham, NC 27706,
SAB COMMITTEE LIAISONS
Dr. William Cooper (EPEC)
Mr. Richard Conway (EEC)
Dr, Morton Lippmann (IAQC)
Dr. Roger McClellan (CASAC)
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Distribution List
Administrator
Deputy Administrator
Assistant Administrators
Deputy Assistant Administrator for Research and Development
Deputy Assistant Administrator for Water
EPA Regional Administrators
EPA Laboratory Directors
EPA Headquarters Library
EPA Regional Libraries
EPA Laboratory Libraries
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