Resource accounting (RA)
Resource accounting (RA) is an approach that enhances the traditional system of national accounts (SNA) by incorporating the value of natural resources into economic measurements. While the SNA focuses on a country's output of goods and services, it often overlooks the depletion of natural resources and environmental degradation, which can misrepresent economic performance. RA seeks to address these gaps by providing a framework that accounts for changes in natural resources due to human activities, treating them as capital assets subject to depletion akin to physical assets like machinery.
Different models of RA exist, reflecting various methodologies and intended purposes, with some aimed at revising the SNA and others serving as supplementary accounts. RA has been used in various contexts, including analyzing sustainable development and informing national economic policies. It emphasizes the need to calculate the economic costs of environmental impacts, such as soil erosion and deforestation, and can adjust national income figures to reflect the loss of ecosystem services. Furthermore, RA can help assess whether nations are on sustainable growth paths by measuring resource consumption against investments in alternative economic sectors. Overall, RA represents a significant shift towards integrating environmental considerations into economic assessments.
Resource accounting (RA)
Resource accounting (RA), which is also called environmental resource accounting or green accounting, refers to accounting systems designed to revise or supplement the conventional system of national accounts (SNA), which is used by national governments and by the United Nations. The conventional system does not consider resource depletion or environmental degradation.
Background
In traditional economics, the system of national accounts (SNA) measures both a country’s output of goods and services and the country’s income. It is used as an indicator of national economic activity and economic performance. However, the SNA does not fully incorporate natural resources in measuring the national product and does not take account of the depletion of natural resources or the degradation of the environment in measuring economic performance. Resource accounting (RA) revises or supplements SNA calculations to correct these omissions.
There is no standardized system of resource accounting. A wide variety of accounting systems have been proposed by economists, depending in part on the purposes to be served by the accounts and the methods used for measuring the relevant variables. Some systems are designed to revise the conventional SNA, but in most cases the authors propose supplements to the SNA. Resource accounting has been used for analyzing the conditions for sustainable development, for shaping national economic policies, and for measuring environmental and economic performance. The United Nations and the World Bank have published analytical studies on RA, and national accounts using RA models have been prepared for a number of countries, including Indonesia, Papua New Guinea, and Mexico. In his April 1993 Earth Day speech, President Bill Clinton called on the Bureau of Economic Analysis to produce “Green GDP [gross domestic product] measures that would incorporate changes in the natural environment into the calculation of national income and wealth.” The US Department of Commerce has published articles on RA and has prepared RA satellite accounts for use as supplements to the department’s SNA.
RA Adjustments to SNA
Resource accounting provides for the following types of revisions of, or supplements to, the existing system of national accounts estimates. First, account can be taken of the changes in physical amounts of natural resources that result from human activities. Natural resources are regarded as capital assets subject to depletion and degradation in a manner analogous to the depreciation of assets such as buildings and machinery. In the SNA, depreciation of human-made capital is deducted from the GDP in calculating the net national product (NNP), but there is no deduction for depletion or degradation of capital. Supporters of RA argue that the failure to deduct natural resource depletion and degradation in calculating net national product or national income is improper because output from natural resource depletion is no longer available for after the resources are exhausted. This concept is in accordance with the economic principle that true income cannot include capital consumption. In RA case studies, soil erosion, deforestation, and the depletion of are considered as major reductions in the GDP. Some models also include the deterioration of water supplies and air pollution.
Second, account can be taken of the final services provided by natural resources and the environment, such as aesthetic benefits from wilderness areas and biological diversity, both of which contribute to the quality of human life. If these services are impaired by human production and consumption, national income and product accounts are adjusted for the reduction of these services. For example, when a dam destroys the scenic value of a canyon, the reduction in the amenities provided by the canyon is regarded as a cost to be deducted from the output attributed to the construction of the dam.
Third, SNA expenditures for environmental protection, such as pollution abatement, can be regarded as costs of production rather than being included in national income. The recycling of waste material and the cleaning of waste dumps are also regarded as costs of production.
Analytical Problems
Full accounting by RA systems for the adjustments listed above involves a number of analytical problems. For example, all RA systems adjust for mineral reserve depletion, but economists do not agree on the proper method of calculating depletion. One simple method is to multiply annual mineral output by the average price of the mineral products and then deduct the cost of labor and capital required for extraction and exploration. However, this method does not take into consideration the net income produced by the mineral, since the entire output is attributed to depletion. A more accurate variation of this approach is to estimate the reduction in the capital value of a mineral between two periods during which extraction has taken place. The problem here is that capital values can change because of a change in the price of the mineral or the cost of producing it, or because of a change in the volume of mineral reserves not related to extraction.
An alternative method, called the user-cost method, divides annual revenue from the sale of the minerals (after deducting extraction costs) into income and depletion, with depletion determined as the amount necessary to create a fund sufficient to yield an annual amount equal to the income portion, beginning after the mineral reserve is exhausted. Both methods have advantages and disadvantages, and both have been used for calculating the net national products of individual countries.
Measuring Sustainable Growth
An important use of RA is to determine whether a developing country is following a path of sustainable development or is depleting its natural resource capital—including its minerals, forests, and soil—under conditions that threaten the economy’s ability to maintain its current level of consumption. If a country saves and invests in other industries an amount equal to the value of the depletion of its natural resource capital, mineral exhaustion may not be accompanied by a decline in economic growth. RA also provides a more accurate measure of a country’s growth rate, because without taking account of natural resource depletion and degradation, the growth rate measured by SNA may overstate the rate that the country can sustain.
Bibliography
Ahmad, Yusuf J., Salah El Serafy, and Ernst Lutz, eds. Environmental Accounting for Sustainable Development. Washington, D.C.: World Bank, 1989.
Bartelmus, Peter, and Eberhard K. Seifert, eds. Green Accounting. Burlington, Vt.: Ashgate, 2003.
Hecht, Joy E. National Environmental Accounting: Bridging the Gap Between Ecology and Economy. Washington, D.C.: Resources for the Future, 2005.
Jorgensen, Sveinung, et al. "Resource Accounting for a Circular Economy: Evidence from a Digitalised Waste Management System." Accounting Forum, vol. 47, no. 4, 17 Mar. 2023, pp. 553-582, doi.org/10.1080/01559982.2023.2166001. Accessed 6 Jan. 2024.
Lange, Glenn-Marie. “Environmental and Resource Accounting.” In Handbook of Sustainable Development, edited by Giles Atkinson, Simon Dietz, and Eric Neumayer. Northampton, Mass.: Edward Elgar, 2007.
Lutz, Ernst, ed. Toward Improved Accounting for the Environment. Washington, D.C.: World Bank, 1993.
Mikesell, Raymond F. Economic Development and the Environment: A Comparison of Sustainable Development with Conventional Development Economics. New York: Mansell, 1992.
Perrings, Charles, and Jeffrey R. Vincent, eds. Natural Resource Accounting and Economic Development: Theory and Practice. Northhampton, Mass.: Edward Elgar, 2003.
Repetto, Robert, et al. Wasting Assets: Natural Resources in the National Income Accounts. Washington, D.C.: World Resources Institute, 1989.
Rogers, Peter P. “Natural Resource Accounting.” In An Introduction to Sustainable Development, edited by Stephen J. Banta, David Sheniak, and Anita Feleo. Cambridge, Mass.: Continuing Education Division, Harvard University, 2006.