# 2. GREEN ACCOUNTING

Environmental accounting focuses on the measurement of natural wealth and the goods and services generated by this natural wealth. Accounting efforts have encompassed accounting for both flow of services, consumption or generating of pollutants and capital accounting—accounting of changes in the stock of natural resources or the condition of the natural environment (Abraham and Mackie, 2005). See also Nordhaus and Kokkelenberg (1999). Tracking natural wealth is key for sustainability. “The core of the idea of sustainability, then, is the concept that current decisions should not impair the prospects for maintaining or improving future living standards” Repetto (1986). Thus, sustainable national income is defined as the maximum amount that can be consumed while ensuring that all future generations can have living standards that are at least as high as that of the current generation.

“Concepts like GDP focus on easily measurable things, whilst omitting ecosystem services and other environmental factors on which life ultimately depends.”<sup>1</sup> Green GDP aims to include environmental degradation in the standard measure of aggregate economic performance, GDP. For this purpose, there exists an established methodology to incorporate environmental concerns into the national accounts grounded in the system of Standard National Accounts (SNA). The system of Environmental Economic Accounting (SEEA) is a satellite account of the SNA, which brings together economic and environmental information into a common framework to measure the contribution of the environment to the economy and the impact of the economy on the environment.

Among other things, the SEEA deals with how the existing SNA might be adjusted to account, in monetary terms, for the impact of the economy on the environment. Three sorts of adjustments are considered: those relating to resource depletion, those concerning defensive expenditures (e.g., protection expenditures), and those relating to environmental degradation (SSF, 2010).

Thus, the SEEA permits the calculation of “green GDP” as an extension of the concept of net domestic product adding the depletion of natural capital to the depreciation of physical capital. Furthermore, emissions of pollutants are assigned (negative) values and incorporated into an environmentallyadjusted Net Domestic Product. Therefore green GDP (g-GDP) is really _net_ and not _gross_ , and it should be better referred to as “green NDP.” However, since the term is widely used we shall continue the usual practice and use “g-GDP” here to denote an environmentally-adjusted NDP.<sup>2</sup> As noted in Abraham and Mackie (2005), the treatment of externalities is a central issue for environmental accounting, and the most important applications relate to air and water pollution. Whether failing to account explicitly for the potentially large negative externalities associated with pollution distorts measures of aggregate output depends on whether only market output or at least some nonmarket output is adversely affected. In the first case, aggregate output is measured correctly, though its allocation across sectors may be incorrect; in the second case, if pollution is considered a negatively valued product, even aggregate output is measured incorrectly (Nordhaus, 2004).

> 1 Lord Robert May; page iii in Dasgupta (2001). 2 See Dasgupta and SSF for the shortcomings of g-GDP as a sustainability indicator.

4