Shortcomings in Human Tools: Advances in Accounting for the Effect of Human Settlements on the Environment

The power of nature that adversely affects our human settlements has been demonstrated in 2010 and again in the first few months of 2011. There have been floods and cyclones in Queensland, floods in Victoria and bush fires in Western Australia in Australia, mud slides in Brazil, earthquakes in Chile, China, Argentina and Japan and the tsunami in Japan.

This loss of natural and built assets provides a clear challenge to the way governments’ fiscal policy and the way nations collectively manage assets.

GDP accounting is the tool we normally use to assess a country and the performance of an economy.

The International Monetary Fund explains it like this:

GDP = C + I + G + NX, where

Gross domestic product is the value of all final goods and services produced in the economy and, on the right, is the aggregate spending or demand in the economy.

C is private consumption,

I is private investment,

G is the purchase of goods and services by Governments, and

NX is exports less imports (the net of production less purchase of other nations' goods and services.

The loss of buildings, factories and workplace equipment in Sendai, Japan and also in Christchurch, New Zealand is not reflected in the GDP figures UNTIL they are replaced.

The Capital Account records the stock of assets, financial and non-financial. At a Conference on Strengthening Sectoral Position and Flow Data in Macroeconomic Accounts jointly organized by the IMF and OECD from February 28–March 2, 2011, T.Rajeswari in a room document explained that "the system of national accounts (SNA) records the production, income, consumption (intermediate and final), accumulation of assets and liabilities, and wealth" of a nation. The basic relationship in the capital account is given by:

Change in net worth due to saving = Gross fixed capital formation and capital transfers -Consumption of fixed capital

+Acquisitions less disposals of other non-financial assets

+ Net lending, its place in fiscal policy is small.

The SNA and GDP accounting have yet to develop measures to record losses of the stocks of assets from natural disasters and the losses to the stock of natural assets by human behaviour (for example, the loss of underground water stocks from mining contamination).

The definition in SNA and GDP accounting restrict measures to assets owned by economic units. Therefore, public assets, held in trust for future generations, do not get measured.

Operational assets of government corporations are measured. National Parks, fish stocks and underground water stocks are neither owned by an economic entity, nor are they measured in the marketplace and therefore have been excluded from the accounts and from economic decision-making.

While the SNA has provision to measure and report the Accumulation Accounts (changes in assets, liabilities and net worth) and the Balance Sheets (stocks of assets, liabilities and net worth) of nations, the Statistics Offices /Bureaux in each country are struggling to prepare such accounts.

As Rajeswari explains: “Accumulation entries include acquisitions less disposals of non-produced nonfinancial assets, other economic flows of non-produced assets, such as discovery or depletion of subsoil resources or transfers of other natural resources to economic activities, the effects of non-economic phenomena such as natural disasters and political events (wars for example).”

But, by definition, “The coverage of assets is limited to those assets which are subject to ownership rights and from which economic benefits may be derived by their owners by holding them or using them in an economic activity as defined in the SNA.

The Balance Sheet reports produced and certain non-produced assets. These non-produced assets include “economic assets needed for production but are not produced through production process, such as land and certain uncultivated forests or mineral deposits.”

Hence our human tools are inadequate to our needs. What are we doing about it?

In 2003, the United Nations developed an Integrated Environmental and Economic Accounting Handbook. This has been revised under the joint responsibility of the United Nations, Eurostat, IMF, OECD and the World Bank. Much of the work was done by the London Group on Environmental Accounting.

The United Nations’ System of Integrated Environmental and Economic Accounting (SEEA) 2003 is a satellite system of the System of National Accounts. It brings together economic and environmental information in a common framework to measure the contribution of the environment to the economy and the impact of the economy on the environment. It provides policy-makers with indicators and descriptive statistics to monitor these interactions as well as a database for strategic planning and policy analysis to identify more sustainable paths of development.”

The SEEA is due to become an international statistical standard in 2012.

The Australia Bureau of Statistics says that the “SEEA allows for consistent analysis of the contribution of the environment to the economy, the impact of the economy on the environment, and the efficiency of the use of environmental resources within the economy. Details of the framework are on its website. The SEEA Stock accounts include the level of stock available and changes to stock within a given period due to both human and natural causes. Stock accounts can be presented using physical and/or monetary values.

For example, water is very high in the national and international development agenda, with several international agreements specifying targets on water supply and sanitation. A System of Environmental–Economic Accounting for Water has been developed. The most notable is the inclusion of two indicators (proportion of population with sustainable access to an improved water source and proportion of population with access to improved sanitation) in a specific target in the Millennium Development Goals (MDGs), namely target 10 - to halve, by 2015, the proportion of people without sustainable access to safe drinking water and sanitation. The System of Environmental-Economic Accounting for Water (SEEAW) provides a conceptual framework for organizing the hydrological and economic information in a coherent and consistent manner.

The SEEAW Manual states “The SEEAW was developed with the objectives of standardizing concepts and methods in water accounting. It provides a conceptual framework for organizing economic and hydrological information permitting a consistent analysis of the contribution of water to the economy and the impact of the economy on water resources.”

The SEEAW includes as part of its standard presentation the following information:

(a) stocks and flows of water resources within the environment;

(b) pressures of the economy on the environment in terms of water abstraction and emissions added to wastewater and released to the environment or removed from wastewater;

(c) the supply of water and the use of water as input in the production process and by households;

(d) the reuse of water within the economy;

(e) the costs of collection, purification, distribution and treatment of water, as well as the service charges paid by the users;

(f) the financing of these costs, that is, who is paying for the water supply and sanitation services;

(g) the payments of permits for access to abstract water or to use it as sink for discharge of wastewater;

(h) the hydraulic stock in place, as well as investments in hydraulic infrastructure during the accounting period.

The SEEAW also presents quality accounts, which describe water resources in terms of their quality” although these are as yet experimental.

Water is but the first in a series of natural resources for which accounting tools are being developed.

The Green GDP is here. China has been reporting their loss of biodiversity through their Green GDP. See Climatico’s website for their view. It is difficult for governments to report when there has been actual loss to human wealth from economic activity. Reports on the Environment have been difficult to incorporate into annual decision-making. See McGovern, Drennan and Meier 2007. Eurostat has considered the Ecological Footprint tool, one that, as yet suffers from the lack of standards and scope.

Work is being done. The challenge is to educate busy people so we become familiar with the work already done, in a way that enables us to incorporate the best of it in our day to day work.

Yet Governments are notoriously slow in implementing new tools to help them monitor the effect of their legislation, policies and activities. The values of a nation change and we frequently value “free goods” outside the control of all of us. New technologies can adversely affect free goods in the environment in a manner new to mankind. While statistical bureaux have been working on the initial design work, the real challenge is to implement the available tools quickly enough to prevent decisions that undermine the sustainability of human settlements.

Early in this century, EAROPH developed “systemic asset management” (SAM) to help members address the need for integrated responses to the development of human settlements. Through the Asia Pacific Institute of Good Asset Management, EAROPH continues to work with governments, NGOs and private sector entities throughout the region to address these challenges.