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Towards green accounting

P. M. Mathew
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Losses that are not taken into account.
Losses that are not taken into account.

Most economists agree to the fact that we can arrive at the real growth rate of the economy only by incorporating the flow of inputs from the environment and accounting for the depletions in natural capital. Leading economists like Kenneth Arrow and Partha Dasgupta are of the opinion that India’s growth rate is 2.5-3 per cent lower than the present 5.3 per cent, when environmental factors and human well being are also included in growth accounting.

Conventional GNP accounts omit many of the inputs which the environment provides to the economy. GNP (Gross National Income) is the aggregate money value of all final goods and services produced in a country in a given year. GNP accounts do not capture the changes in the flow of services from ecosystems. When a country depletes its natural capital, this is ignored in the national accounts, although depreciation in man-made capital is accounted for.

Depreciation in manmade (physical) capital is deducted from GNP to arrive at NNP (Net National Product), which is a better indicator of the performance of the economy. Also, in the traditional GNP estimation many contributions of the ecosystem like bio-remediation by wet lands, pollination of crops, carbon sequestration and prevention of soil erosion by forests and storm and flood protection by mangroves gets ignored.

GNP’S LIMITATIONS

Now, economists strongly argue that a mere estimation of NNP does not demonstrate the real strength of the economy. They now want GNNP (Green Net National Product) to be estimated to serve as a still better and real indicator of the performance of the economy.

Given its multifaceted usefulness in policy analysis, green accounting can play a crucial role in the sustainable development agenda of countries. The Government of India has constituted an expert group under the chairmanship of Dasgupta for computing the GNNP of India. This group is expected to measure the impact of economic growth on biodiversity and ecosystem services. The data gained by valuing ecosystems are critical to help governments make more sustainable decisions.

Green accounting is a controversial subject. There are critics who say that it is very difficult to have monetary values for the contributions of ecosystems. In 2006, China dropped an attempt to develop a green GDP index, saying it was too difficult to accurately calculate a figure for GDP adjusted for the impact on the environment. Even the US has not initiated action on green accounting.

DATA ISSUES

The task before the expert group headed by Dasgupta is formidable and challenging. Reliability and availability of data will be the main challenge. In India, many studies are far from satisfactory as application of the data base and methodologies are not coming from peer-reviewed sources. There is much to be done both in terms of developing capacity to monitor environmental trends, and in developing widely accepted methods to weight or value different classes of environmental goods. Valuing some natural assets such as clean air and water is complicated, since these goods are generally not traded in markets and alternative techniques for monetary valuation of these assets face conceptual and empirical challenges.

Green accounting as a discipline is still evolving. It covers complex and diverse topics that are still subject to debate.

(The author is Professor of Economics, Christ University, Bangalore.)

(This article was published on December 5, 2012)
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Comments:

Well said! If natural resource depletion is going to make life difficult without ground water and excess pollution the man made capital will always fall short of needs. Thus setting back gains.

from:  Veena
Posted on: Dec 6, 2012 at 02:17 IST

Yes, Green accounting is an essential parameter for evaluating the sustainable economic growth rate of every nation since natural resource are the most significant prerequisite for any kind of physical development. The level of exploitation of non renewable energy sources against actual requirements for a sustainable life, need to be audited.

from:  Binoy T A
Posted on: Dec 8, 2012 at 10:45 IST
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