To do so, there is a need to estimate shadow prices for environmental goods, including the values of _in situ_ natural resources and the damages to production and welfare associated with the depletion and degradation of the environment. For commercial natural resources the shadow prices are readily estimated, and robust methods exist for valuing certain pollution damages, such as the damage to health associated exposure to air pollution.<sup>12</sup> But for important natural assets, such as biodiversity, arriving at sound shadow prices is more problematic. In addition, ecological services are largely capitalized in existing asset values (pollination service values are capitalized in the value of farmland, for example), but not explicitly – for policy purposes it will therefore be useful to break out ecological service flows in extended national accounting systems.<sup>13</sup> Key green accounting indicators include adjusted measures of net saving and net income. Savings measures adjusted for the depletion and degradation of the environment provide a measure of sustainability: if net saving is negative then social welfare – the present value of utility – is falling (Hamilton and Clemens 1999, and Dasgupta and Mäler 2000). Net income can then be measured as consumption, plus the direct contribution of the environment to wellbeing (with price ), plus net saving (Asheim and Weitzman 2001).<sup>14</sup> Source: Kirk Hamilton

# **Why not grow now and clean up later?**

Some dimensions of environmental quality improve with average income (e.g., air quality, water quality), while others do not (see the long debate on the environmental Kuznets curve).<sup>15</sup> In this framework, one explanation for income-related environmental improvement is that the environment is a superior good:<sup>16</sup> when C is low, the utility U does not depend much on E. This would imply that poor people care less about the environment, give priority to economic consumption C over environmental quality E, and act upon these preferences. At higher levels of consumption, with basic needs having being met, people will put a higher weight on the environment, leading to investments in environment protection and clean-up that will increase environmental quality, assuming the appropriate collective action proves possible: This idea leads to the conclusion that environmental issues will “solve themselves” with economic development. In this framework, little effort is needed on environmental protection in poor countries, at

> 12 For resource depletion, the United Nations (2003) is developing guidelines for green accounting. A recent paper by Muller et al. (2011) estimates the total value of pollution damages in a national accounting framework.

> 13 See the WAVES partnership; <u>http://go.worldbank.org/89A3W2FTU0. A good reference on environmental</u> valuation is Freeman et al. (2003).

> 14 The link between net saving and social welfare is only certain to hold if the accounting is complete, however, covering all assets which contribute to production or welfare.

> 15 The empirical literature on the Environmental Kuznets Curve (EKC) was triggered by Grossman and Krueger (1993, 1995). Early empirical contributions also include Selden and Song (1994), and Shafik & Bandyopadhyay (1994); for a review, see Barbier (1997). Many subsequent work has aimed at deriving an EKC analytically, see, e.g. Stokey (1998); Andreoni and Levinson (2001);  Brock and Taylor (2010).

16 Another common interpretation is that the environmental Kuznets curve reflects structural transformation of an economy. As economies transform from largely agrarian to more industrial, environmental quality deteriorates. But as economies shift from largely industrial to more service-sector oriented, environmental quality impro ves.

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