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ACCOUNTING'S job is to measure all that goes to hit the bottomline. There is a risk, however, of missing the woods when counting the trees.

Nowhere is this truer than with regard to environment accounting.

"Environmental resources and their contribution to the economy are not adequately captured in the Net National Product (NNP) measured through the conventional System of National Accounts (SNA)," writes Jyoti Parikh in her foreword to the book Environmental and Economic Accounting for Industry by M. N. Murty and Surender Kumar, a publication of Oxford University Press (www.oup.com).

The farce of accounting gets exposed when "NNP can increase even when natural resource stocks deplete or environment quality goes down."

In the area of environmental accounting, the United Nations has recommended the use of `non-market valuation' to measure `damages from the environmental degradation and benefits from the preservation of environmental resources.'

The book provides a framework for Indian industries, by looking at how shadow prices can be estimated for pollutants.

The problem with environmental resources such as atmosphere, water and forests is that valuation is difficult, with no market to bank upon as in the case of exhaustible resources such as minerals and fossil fuels.

"There are two methods of measuring sustainable income," states the intro. These are: Net price method and user cost method.

"The net price of a depleted resource is its present value that is equal to revenue or rent reflecting the depletion of the resource; it has to be deducted from gross income in the same manner as depreciation is deducted from value added in manufacturing activities."

By applying such a yardstick, one may find many a healthy corporate result dimming into the red zone, but as small mercies, there is no statute yet that mandates environmental accounting for businesses.

The second method goes this way: "User cost method assumes that man-made capital is substitutable to natural capital and uses the definition of true income, that is, the amount of consumption that will not harm future use.

A finite series of anticipated revenues from the resources being depleted must be converted into an infinite series of true income in such a way that the current value of both are equal."

Other things being equal, it is more probable that economists engage themselves in exercises of this nature rather than bean-counters.

What may come as a shock to business is that it produces both `goods' and `bads'. "Industry produces a vector of pollutants, bad outputs, jointly with the good outputs."

The authors, therefore, argue for `pollutant-specific taxes'.

It may take a long time for the country's tax system to factor in pollution, but when that happens we may realise how the costs of many goods and services were artificially low all along.

BooksOfAccount@rediffmail.com

D. Murali

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