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Scottish Economic Statistics 2002

A2 Developing Environmental Accounts for Scotland

Lynn Graham, Scottish Executive

Over the last decade, as society has become more conscious of the effects on the environment of economic activity, an increasing number of countries have begun to produce Environmental Accounts on a regular basis. The Scottish Executive has recently set up a working group to look at the demand for Environmental Accounts for Scotland and to consider how best to progress the development of official statistics in this area.

This paper gives a brief introduction to environmental accounting, describing what Environmental Accounts are and how they can be used in the analysis of our environment and the policies affecting it. It goes on to describe the current plans to consider the development of Environmental Accounts for Scotland.

Introduction

It is no longer adequate to consider a country's economic performance in isolation from the associated environmental impact. There are two main ways in which an economy interacts with its environment: it draws on natural resources and it uses the environment to absorb unwanted by-products. Natural resources are extracted from the natural environment and transformed into energy and commodities during the production process. This process can also result in emissions of waste and pollutants. The exclusion of environmental information from the National Accounts for a country implies that there is an unlimited stock of natural resources. Additionally, the environment can be used as a waste dump. However, it is appreciated that resources are limited and that the environment has a finite capacity to absorb waste, but unless costs are attributed to both of these activities, then these constraints will remain unaccounted for in the National Accounts. The more environmental resources and pollutants identified in the Environmental Accounts, the more robust our understanding of environment/economy interactions will become.

Environmental accounting focuses on two main objectives:

• To provide an indicator of sustainability. This can be defined as achieving economic growth while ensuring that this growth is not to the detriment of the standard of living enjoyed by future generations.
• To provide an enhanced measure of welfare. In addition to areas such as health, education and housing, the state of our environment is of increasing importance when considering public welfare.

The Scottish Executive has set out its commitment to sustainable development and environmental welfare in its Framework for Economic Development in Scotland¹.

"...development is sustainable so that future generations are considered... We must also recognise that the environment is one of Scotland's key assets. It supports important areas of the economy...and is a key element in people's quality of life..."

The Environmental Accounting Framework

Official guidance on the compilation of Environmental Accounts was given in the 1993 System of Environmental Economic Accounts (SEEA)². The United Nations' Environmental Statistics Section is presently working on the revision of the SEEA in collaboration with the London Group³ which is one of the City groups⁴ - these are informal groups created to address selected problems in statistical methods.

In general, Environmental Accounting can take two forms. The first is a set of satellite accounts external to the National Accounts that will facilitate analysis of environmental interactions but will not change the macro-economic aggregates e.g. Gross Domestic Product (GDP). An alternative form is to make environmental adjustments to the existing National Accounts to create, for example, what is often termed "Green GDP".

Although full National Accounts equivalent to the UK Blue Book⁵ are not available for Scotland⁶, Scottish Input-Output tables are now compiled on an annual basis⁷. These form the basis of a number of the Environmental Accounts described in this paper.

The next two sections of this paper give a brief overview of the type of Environmental Accounts that can be compiled, highlighting their use. The terminology used to describe Environmental Accounts varies between countries and practitioners. For the purposes of this paper the accounts have been grouped under the following headings:

• Environmental Satellite Accounts
  • Flow Accounts
  • Asset Accounts
• Environmental Adjustment to Macro-economic Aggregates

Environmental Satellite Accounts

The system of national accounts is an exhaustive and consistent system with boundaries on the activities it covers. Often analysts wish to consider a particular area of interest in more detail or in a different way - satellite accounts can be used to this end. Satellite accounts can be compiled for Transport, Tourism and Households as well as for the Environment. These accounts do not disrupt the central national accounting system and therefore do not alter the macro-economic aggregates.

Flow Accounts

As described above, the economy interacts with the environment in two ways: using environmental resources as inputs and using the environment to absorb unwanted by-products. The resources being used are termed "natural resources" and include minerals & energy resources, land, water and biological resources such as forests and fish. The by-products or "emissions" being output into the environment can be pollutants released as gases or into water, or can take the form of solid waste.

Flow accounts look at these environmental inputs and outputs for an economy over a specific time period. Flows can either be represented in physical units or can be analysed alongside the National Accounts in monetary units. The term "National Accounting Matrix with Environmental Accounts" (NAMEA) is increasingly used to describe these types of accounts. Essentially this is a matrix representation of the environmental accounts alongside the economic accounts.

Flows showing environmental resource use and emissions

Different types of flow accounts can be constructed. Those built around the Supply and Use tables or Input-Output (I-O) tables can be used to show the flows of resource use and emissions. A lot of work to date has concentrated on pollution emissions extensions and the Netherlands was one of the forerunners in this area. An increasing number of countries - especially in Europe - are now producing this type of account on a regular basis. These accounts are external satellite accounts in that they incorporate additional activities which are beyond the boundaries of the traditional National Accounts.

A NAMEA can be constructed at various levels e.g. national, sectoral or industry level. It can also be constructed to look at a specific resource or pollutant. A full set of environmental data is therefore not necessary to construct a NAMEA, and initially accounts could be limited to those areas where reliable data are available or where there is a particular policy interest. For example, it may be of interest to look specifically at a particular pollutant or a group of pollutants relevant to an environmental theme e.g. greenhouse gases or acid rain, or to compile an account for the household sector to examine the link between consumer behaviour and the environment.

One limitation of these accounts is that they cover a specific time period and therefore analysis over time of the effects of changes in technology or consumer behaviour can only be achieved through a consistent series of accounts for different years.

The NAMEA allows many of the applications of I-O tables to be extended to examine environmental effects. A series of accounts could be used to examine how structural changes in the economy have impacted on the environment. Another application of I-O is for economic impact analysis or 'what-if' analyses. The impacts of specific economic events or alternative policy issues could be simulated to assess the environmental implications.

Flows showing activities and products related to the environment

The accounts described above look at all economic activity and consider the environmental inputs and outputs. Another type of flow account is one that looks specifically at products and industries within the economy for which the primary focus is the environment e.g. waste disposal or recycling. This is an internal satellite account in that it is an elaboration of the existing National Accounts, highlighting the environmental activities of interest.

For this type of account, activities have to be classified in terms of their purpose i.e. environmental or other. The interest here is in activities for environmental protection or management of natural resources. Once separately identified, we can study who is making environmental products and who is buying them, who is investing in environmental expenditure and who is bearing the brunt of the cost (e.g. consumers, government or industries). The accounts can be used over time as an indicator of changes in consumer behaviour or economic activity in response to environmental needs, and can provide a framework for 'what-if' analysis and evaluation of policies. This type of account can also form part of a NAMEA.

Other environmental economic transactions

To obtain a complete picture of environmental flows in the economy, it is necessary to move beyond the boundaries of the I-O tables to cover other monetary transactions resulting from government legislation which flow through the capital or income accounts. An example of this is environmental taxes e.g. transportation taxes, energy taxes, pollution taxes. Property rights and property income relating to environmental assets must also be covered, as will new legislation brought in to determine who has rights to use natural assets or areas for waste disposal.

Capturing these transactions along with the activities described in the previous flow accounts will allow construction of a full NAMEA showing all environmental flows for the period.

Asset Accounts

Flow accounts can be used for modelling purposes and to measure how structural and behavioural changes affect the economy's impact on the environment. What they do not tell us is how much of the environment's natural resources remain and whether or not we are using these resources in a sustainable manner. To do this we use an asset account. This account takes the stock of a resource at the beginning of the year and adjusts this according to what has been used or replenished during the year, resulting in an end of year stock value.

These accounts are compiled for the natural resource of interest, in contrast to company asset accounts, which are usually compiled for all types of assets belonging to one owner. The main natural resources covered by these accounts are minerals & energy, land, water, fish and forests. The account attempts to give the fullest possible picture of the natural resource and asset accounts for different resources will take different forms. For example, it will be important to cover government legislation in fish accounts due to the importance of fish licences and quotas; and accounts for land will focus on the changing quality of the land instead of the changing quantity. The definition of assets as given in the National Accounts is extended to cover all environmental assets of interest.

Asset accounts can also be linked to the NAMEA, providing a link between stocks and flows.

Environmental Adjustments to Macro-economic Aggregates

The above accounts sit alongside the National Accounts and do not change the national aggregates derived from them. There is still much debate as to whether or not it is theoretically possible to make an estimate of, what is often termed, "Green GDP". Some think it should not be attempted while those who agree with it in principle have still not reached a consensus on exactly how it should be calculated. Questions over the availability of the required data and the appropriateness of official statisticians calculating Green GDP still remain. However, it is seen by some as the ultimate goal in environmental accounting: a measure that pulls together information on economic growth and environmental effects, which can be used to assess a country's performance over time and against other countries.

Adjustments to conventional National Accounts are necessary because the accounts omit many of the inputs that the environment provides to the economy, since some are not priced by the market. In addition, no account is made for the impact of environmental damage on current and future welfare. There are various measures which have been developed by academics and there is still much debate as to how the adjustments should be made. For example, the following adjustments could be made to Net National Product to calculate Green NNP:

• For non-renewable resources - conventional national income is reduced by an amount equal to the value of the resources used after allowing for new discoveries (with relevant price adjustments)
• For renewable resources - net change in stock of resources is deducted from conventional national income
• For pollution - national income is reduced by an amount equal to the change in stock of each pollutant multiplied by its marginal damage cost.

One of the main problems when calculating such measures is that of valuation. There are real conceptual and technical difficulties in putting monetary values on both natural resources not priced by the market, and on environmental damage which is neither prevented or rectified.

Use of Environmental Accounts

Throughout this paper reference has been made to some of the analytical applications of the accounts. Flow accounts can be used for impact analysis, modelling and measuring the effects of structural, behavioural and legislative changes on the environment, while asset accounts can be used to consider questions of sustainability. The range of policy uses to which environmental accounts can be applied is vast, and countries are continually developing new applications of the accounts to analyse policy questions specific to their country/environment. Below are some examples of policy applications.

Targeting industrial environmental inefficiency

When setting environmental policy, it is important to have as much information as possible on the causes of environmental impacts and the industries of most relevance. I-O extensions can identify which industries and technologies are of most concern. Measuring an industry's use of energy & natural resources and emissions in relation to its output, can, over time, give an indication of the environmental efficiency of the industry.

Environmental impact of household consumption

The I-O tables can be used to look at production from the perspective of the final user, identifying all the indirect economic activities that have contributed to the final product being purchased. This analysis can allow attribution of environmental effects not only to the producers but also to the consumers. For example, we can look at household consumption and trace back through the economy the environmental consequences of meeting that consumer demand. Taken with households' direct spending on energy and behaviours with regard to recycling etc., we can build a picture of the environmental implications of consumer behaviour.

Other environmental issues can also be considered and modelled e.g.:

• What are the consequences of introducing new levels of environmental expenditure on the levels of pollution?
• What level of taxation would result in the desired reduction in pollution and how would this impact on economic performance?
• What level of solid waste is likely to be produced from different production and consumption patterns and does our environment have adequate landfill areas to cope with this?

Taken with the broader measures of sustainable wealth and income, Environmental Accounts have the potential to assist in many policy decisions.

Development of Environmental Accounts in Scotland

Environmental Accounts for the UK were first published in 1996 by the Office for National Statistics⁸. Since then, the quality of data sources has been enhanced and the number of accounts produced has increased.

Until now, academics and consultants have undertaken most of the work on Scottish Environmental Accounts. This work has covered both extensions to the I-O tables⁹ and adjustments to macro-economic indicators¹⁰. However, Scottish Executive statisticians also produce environmental statistics annually and have worked with academics on environmental I-O extensions based on the 1989 Scottish Input-Output tables¹¹.

In order to take forward consideration of the development of Environmental Accounts for Scotland, a seminar was held by the Scottish Executive in October last year. The seminar provided an overview of environmental accounting and assessed the level of interest in producing such accounts for Scotland. Speakers were invited from academia and from the UK Environmental Accounts branch of the Office for National Statistics.

As a result of the positive feedback received during and after the seminar, the Scottish Executive has now established the Scottish Environmental Accounts Working Group (SEAWG). The group comprises academics, consultants and government officials from the fields of national accounting, environment and environmental accounting. The first meeting of the group took place in December 2001 where the main elements of the group's remit were agreed as:

• identification of the main policy areas within the Scottish economy that can be addressed using environmental accounts;
• identification of which type of environmental account should be calculated;
• advice on the prioritisation of areas of developmental work;
• provision of technical advice on existing methodologies, developmental work and new indicators;
• act as a working group to the main Economic Statistics and Natural & Built Environment Statistics SCOTSTAT committees.

Conclusion

This paper has provided a brief overview of the theoretical framework for environmental accounting, showing what accounts a country may, ideally, wish to compile. What can be developed for Scotland will depend not only on the policy areas of interest but also on the availability of required data - on both the economy and the environment. In addition, technical issues such as valuation and defining asset boundaries - deliberately omitted from this paper - will need to be addressed.

If you have an interest in the development of environmental accounts for Scotland or wish to know more about the work of the SEAWG please contact: maria.melling@scotland.gsi.gov.uk

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