Review of Income and Wealth

Series 37, No. 2, June 1991

INTEGRATED ENVIRONMENTAL AND ECONOMIC ACCOUNTING:

FRAMEWORK FOR A SNA SATELLITE SYSTEM

United Nations Statistical Ofice

Federal Statistical Ofice, Germany

AND

JAN VAN TONGEREN

United Nations Statistical Ofice

National accounts have provided the most widely used indicators for the assessment of economic
performance, trends of economic growth and of the economic counterpart of social welfare. However,
two major drawbacks of national accounting have raised doubts about the usefulness of national
accounts data for the measurement of long-term sustainable economic growth and socio-economic
development. These drawbacks are the neglect of (a) scarcities of natural resources which threaten
the sustained productivity of the economy and (b) the degradation of environmental quality from
pollution and its effects on human health and welfare. In the present paper, the authors attempt to
reflect environmental concerns in an accounting framework which maintains as far as possible SNA
concepts and principles. To this end, the accounting framework is used to develop a "SNA Satellite
System for Integrated Environmental and Economic Accounting" (SEEA). Environmental costs of
economic activities, natural asset accounts and expenditures for environmental protection and
enhancement, are presented in flow accounts and balance sheets in a consistent manner, i.e. maintain-
ing the accounting identities of SNA. Such accounting permits the definition and compilation of
modified indicators of income and expenditure, product, capital and value added, allowing for the
depletion of natural resources, the degradation of environmental quality and social response to these
effects. A desk study of a selected country is used to clarify the proposed approaches, to demonstrate
their application in future country studies and to illustrate the quantitative effects of the use of
modified concepts on the results of analysis.

The discussion of environmentally sound and sustainable socio-economic

development has received increased attention by the international community,
stimulated in particular by the report of the World Commission on Environment
and Development (1987). At its forty-second session, the General Assembly
welcomed the Commission's report (resolution 421 187) and adopted an "Environ-
mental Perspective to the Year 2000 and Beyond" which proclaimed "as the
overall aspirational goal for the world community the achievement of sustainable
development on the basis of prudent management of available global resources
and environmental capacities" (resolution 421 186). Environmentally sound and

Note: The authors thank Hubert Donnevert and Stefan Schweinfest for their assistance on the
present version. The views expressed by the authors are their own and not necessarily those of their
respective institutions.
sustainable development will also provide the basic theme for the planned United
Nations Conference on Environment and Development in 1992.
The need for clarifying this new development concept and for developing
methodologies for its assessment and implementation has been recurrently
stressed in international conferences, seminars and workshops. Joint workshops,
organized by UNEP and the World Bank, examined the feasibility of physical
and monetary accounting in the areas of natural resources and the environment
and developed alternative macro-indicators of ecologically adjusted and sustain-
able income and product (Ahmad, El Serafy and Lutz, 1989). A consensus
emerged in the workshops that enough progress had been achieved to link
environmental accounting to the standard System of National Accounts, the SNA
(United Nations, 1968), and to include certain aspects of environmental account-
ing in the ongoing revision of SNA.
National accountants and environmentalists reviewed a first draft of the
present paper in a UNEP/World Bank-sponsored expert meeting (Paris, Novem-
ber 21-22, 1988). The experts at the meeting endorsed the idea of developing a
satellite system of environmental accounts and discussed a variety of methodologi-
cal and procedural questions. These questions should be resolved before preparing
an internationally recommended manual of environmental accounting. The
experts also requested that the revised SNA should elaborate on the approaches
to incorporating environmental concerns in national accounts.
The immediate objective of the present framework is to serve as the basis
for the preparation of a "SNA Handbook on Integrated Environmental and
Economic Accounting" to be issued within the United Nations series of national
accounting handbooks. The framework should also facilitate the consideration
of environmental accounting in the revised SNA, possibly as part of a more
general treatment of the concept of satellite accounts and with appropriate
cross-referencing to the Handbook. The draft methodologies have been tested in
pilot country studies, and will be distributed widely for comments and contribu-
tions.
The framework discussed in this paper is the basic structure for a "Satellite
System for Integrated Environmental and Economic Accounting" (SEEA). It is
presented in tabular form with an illustrative set of data and is described in some
detail in the text. In section 2 the main objectives of environmental accounting
as well as the general structure of the SEEA are described. Section 3 contains a
description of the supply side of goods and services, focusing on environmental
protection services and the supply of natural growth products. The accounting
for the costs of environmental depletion and degradation, resulting from produc-
tion and consumption, is the main issue of section 4. In this section, the authors
also explain how these costs affect value added and final demand. One basic
indicator, the Environmentally Adjusted Net Domestic Product or "Eco Domestic
Product" (EDP) is presented in this context. In section 5 the flow accounts of
sections 3 and 4 are complemented by the presentation of stock assets of tangible
wealth that include natural assets and changes therein. In section 6 the possible
extensions of the flow accounts to obtain welfare-oriented macro-indicators are
discussed. Finally, some comparative analyses of the conventional and environ-
mentally modified concepts are presented in section 7.
 2. GENERALFEATURESOF A SATELLITESYSTEMFOR INTEGRATED
ENVIRONMENTAL
A N D ECONOMICACCOUNTING (SEEA)
(a) Objectives of Integrated Environmental and Economic Accounting
The focus of traditional systems of national accounts on market and some
related non-market transactions (except for imputations for "directly competitive"
non-market production of goods and services) has effectively excluded the
accounting for changes in the quality of the natural environment and the depletion
of natural resources. These effects have been considered to be particularly relevant
for the assessment of long-term sustained growth and development and of
increases in "social welfare." The overall objective of environmental accounting
is thus to measure more accurately the structure, level and trends of socio-
economic performance for purposes of environmentally sound and sustainable
development planning and policies. The attainment of this objective would
facilitate both the systematic compilation and analysis of environmental and
related socio-economic data and the formulation of alternative standard macro-
economic variables for the analysis of environmental-economic interrelationships.
The current revision of the SNA (United Nations, 1990) presents a unique
opportunity to examine how the various concepts, definitions, classifications and
tabulations of environmental and natural resource accounting can be linked to
or incorporated in the SEEA. It may appear premature, however, to radically
change a well-established system of economic accounts that serves many different
short-, medium-, and long-term socio-economic analyses. Further elaboration of
the standards of environmental and natural resource accounting in a SNA satellite
system of environmental accounts has therefore been proposed (Bartelmus, 1987).
A similar view was expressed by the experts working on the current revision of
the SNA (Lutz and El Serafy, 1989).
Satellite systems of national accounts generally stress the need to expand
the analytic capacity of national accounting for selected areas of social concern
in a flexible manner, without overburdening or disrupting the "core" system
(Lemaire, 1987; Teillet, 1988; Schafer and Stahmer, 1990). Typically, satellite
accounts allow for the:
-provision of additional information on particular social concerns of a
functional or cross-sectoral nature,
-linkage of physical data sources and analysis to the monetary accounting
system,
-extended coverage of costs and benefits of human activities, and
-further analysis of data by means of relevant indicators and aggregates.
Accordingly, the following specific objectives can be formulated for the planned
SEEA:

(i) Segregation and Elaboration of All Environment-Related Flows and Stocks

of Assets of Traditional Accounts
Satellite accounts, in the narrow sense of detailed accounting for expenditures
and revenues in major areas of social concern, were pioneered by France (Institute
National, 1986a). There is now an increased interest in segregating all flows and
stocks of assets in national accounts related to environmental issues and, in
particular, in estimating the total expenditure for the protection or enhancement
of the different fields of environment. One objective of this segregation is the
identification of the increasing part of the Gross Domestic Product (GDP) which
reflects the costs necessary to compensate the negative impacts of economic
growth ("defensive expenditures") rather than increases in "true" (welfare-
relevant) income (Hueting, Leipert, 1987; Leipert, 1989; and Olson, 1977).

(ii) Linkage of Physical Resource Accounting with Monetary Environmental

Accounting and Balance Sheets
Physical resource accounts aim at covering comprehensively the total stock
or reserves of natural resources and changes therein, even if these resources are
not (yet) affected by the economic system.' The proposed accounting for these
resources is considered the "hinge" by which comprehensive physical resource
accounts could be linked to the monetary balance sheet and flow accounts.
Another important method for analyzing the environmental-economic interre-
lationship in physical terms is the development of materiallenergy balances
(Ayres, Kneese, 1969; Ayres, 1978; United Nations, 1976). This approach allows
in particular the linkage of input-output tables with data on natural resource
inputs, the description of the transformation of natural resources in the production
process and the assessment of the generation of residuals of the economic activif'es
(Isard, 1969; Leontief, 1973). Systems of environmental statistics such as those
proposed by the United Nations (in preparation) should facilitate achieving
compatibility between physical and monetary accounts by specifying those para-
meters that could be valued in monetary terms to obtain the figures required in
environmental accounts. Non-monetary data in physical accounts are considered
to be an integral part of the SEEA and will be fully elaborated in the Handbook
on Integrated Environmental and Economic Accounting. However, the present
framework will concentrate on the monetary stocks and flows of an environmental
accounting system.

(iii) Assessment of Environmental Costs and Benefits

In contrast to the above-mentioned "narrow" satellite accounts, a broader
framework for satellite accounting, covering additional "external" environmental
costs and benefits, is proposed here. Taking the current state of knowledge and
data availability into account, this framework focuses on expanding and com-
plementing the SNA, with regard to two major issues, namely
-the use (depletion) of natural resources in production and final demand and
-the changes in environmental quality resulting from pollution and other
impacts of production, consumption and natural events on one hand and
environmental protection and enhancement on the other.
Possibilities of extending the framework for the analysis of environmental welfare
effects, i.e. the "damage costs" of human health impairment, recreation and other
aesthetic or ethical values, are also indicated.

'See e.g. the Norwegian approach to natural resource accounting (Alfsen, Bye and Lorentsen,
1987) or the more complex (including interactions in the biophysical environment) French "natural
patrimony" accounts (Institute National, 1986).
 (iv) Accounting for the Maintenance of Tangible Wealth
The recent discussion of the new paradigm of sustainable development
stressed the need to fully account for the use of both man-made and "natural"
capital in order to alert to possible non-sustainable growth and development
scenarios. The proposed framework aims at extending the concept of capital to
cover not only man-made capital, but also natural capital. Accordingly, SEEA
will include additional costs for the depletion and degradation of these natural
assets. It will also extend the concept of capital formation to capital accumulation
which reflects additionally the deterioration of natural capital as a result of
economic uses.

(v) Elaboration and Measurement of Indicators of Environmentally

Adjusted Income and Product
The consideration of the depletion of natural resources and changes in
environmental quality permits the calculation of modified macro-economic aggre-
gates, notably the Environmentally Adjusted Net Domestic Product, short: Eco
Domestic Product (EDP).
All these objectives can only be realized step by step. Initial emphasis in
practical work should be on the improvement of physical environmental data
and on linking them with national accounts as a prerequisite for the valuation
of environmental effects.

(b) Scope and Structure of the S E E A

The proposed SEEA follows as far as possible the principles and rules
established in the SNA (United Nations 1968, 1977, 1990). It is based on SNA's
production boundary, follows its analysis of costs and outputs and incorporates
the same accounting identities between supply and use of products and between
value added and final demand. Information needed for environmental analysis
is presented separately. In this manner, original (unadjusted) SNA data can be
directly compared with environmentally adjusted statistics and indicators, facili-
tating the linkage with the central framework of the SNA. Such compliance and
linkage with SNA aims at better integration of environmental variables into
established economic analysis.
The very nature of a framework allows only the most important concepts
and accounting procedures to be highlighted. Definitions, classifications, valu-
ation principles, data sources and processing will be further elaborated on in the
Handbook on Integrated Environmental and Economic Accounting. The Hand-
book will benefit from the experience gained in country studies and existing
expertise at the national and international levels.
The present framework seeks to be flexible regarding alternative approaches
to integrated environmental-economic accounting and analysis. The interrelation-
ship between the environment and the economy is described as complete as
possible. However, in line with the production boundary of SNA, phenomena
that take place wholly within the environment, i.e. outside the economic system,
are excluded. Such phenomena are probably better accounted for by the use of
complementary biophysical resource accounts and systems of environment statis-
 tics and monitoring. Also, welfare effects from environmental quality degradation
that affect "human capital," i.e. human health and welfare, are not accounted
for in the present framework. However, as shown below (see section 6), a
"window" to the analysis of environmental damage related to human welfare
has been opened, facilitating further extension or alteration of the framework
for such analysis.
The main emphasis of the proposed scheme is on the implications of the
environment for production, value added, final and intermediate demand and
tangible wealth. Therefore, the framework does not present complete accounts
for all institutional sectors. Transactions related to income distribution and those
concerning intangible assets, including exploitation rights, and also financial
assets are excluded. A complete analysis of the interrelationships between the
economy and the environment will call for an extended system of all institutional
accounts, which shows not only the flows of goods and services, but also of
income and finance.
In Table 1 the general structure of the system which consists of three basic
components is illustrated. In Tables 1.1 and 1.2 the supply and use of goods and
services is shown. The asset accounts with opening and closing assets and the
items linking them are shown in Table 1.3. Tables 1.2 and 1.3 are connected via
the accounts of capital accumulation. The component tables are further elaborated
on in Tables 2, 3 and 5 as explained in sections 3 to 5.
The supply Table 1.1 contains an additional row which shows the involuntary
"imports" of residuals (wastes etc.) of foreign economic activities which were
transported to the domestic economy (-1.6). The use/value added Table 1.2 is
extended by row as well as by column. In the table, we show not only the
traditional GDP and NDP, but also further corrections due to the use of natural
assets (depletion of natural resources, degradation of natural assets by residuals,
agricultural and recreational use etc.). This use is valued with the costs which
would have been necessary to keep the natural capital intact (ecological valuation;
see below section 4c for an alternative approach in the case of "exhaustible"
resources). These costs are interpreted as the decrease in value of the natural
assets comparable to the consumption of man-made fixed assets. The deterioration
of the natural assets could be caused by current production activities (59.8),
consumption activities (household consumption 17.1) or by (scraps of) produced
assets (5.1). The restoration activities of the government diminish the impacts of
the economic activities on the natural assets (-5.0). The use of natural assets
could affect the domestic nature (loss of ecological functions of the produced
biological assets -0.9, natural non-produced assets -73.0) or-as far as the
generation of residuals is concerned-could lead to transportation to the rest of
the world (exports: -4.7). The value of the deterioration of the domestic as well
as foreign natural assets caused by domestic sources (59.8f22.2 = 82.0) is used
for estimating the environmentally adjusted Net Domestic Product (NDP), called
Eco Domestic Product (EDP) (185.1) (see section 4c below).
The asset accounts (Table 1.3) show the produced assets (including cultivated
biological assets) and the non-produced assets which contain only natural assets
(wild biota, land, subsoil assets, water and air). Market valuation is applied
except for the depletion and degradation values of natural assets shown in the
uselvalue added table (Table 1.2). These volume changes are valued with the
(hypothetical) costs for maintaining them on the same overall quantity and quality
level during the reporting period. The question of how such values could be
integrated into the asset balances containing mainly market values is discussed
in section 5.

The supply table (Table 2) includes two elements: gross output, resulting
from domestic production, and imports. Gross output is cross-classified by indus-
tries and type of product (good or service). Imports are classified by the same
type of product as domestic gross output, so that the two elements of supply can
be added together to obtain total supply by product. Furthermore, the involuntary
"imports" of residuals of foreign economic activities are shown. This item could
contain e.g. the unaccepted dumping of foreign wastes in national territories.
In Table 2 we show a breakdown of domestic production activities by
environmental protection activities and other industries. The fully elaborated
system will display a further breakdown by industries according to the Inter-
national Standard Industrial Classification of all Economic Activities (ISIC)
(United Nations, 1990a).
A major modification of the SNA is the separate identification of environ-
mental protection services from other production activities for all industries. The
separation is to facilitate the assessment of the importance of environmental
activities in gross output, employment, other production costs, and in capital
consumption. Environmental protection services comprise in principle all
activities to maintain and enhance the quality of the natural assets. This could
be achieved by avoiding environmental impacts of the economic activities (e.g.
by using integrated or end-of-pipe technologies) or by restoring the natural
environment already degraded or depleted. Environmental protection activities
can be produced for third parties (external use) as main or secondary production
activities of the establishments (36.2) or they can be used internally. The internal
provision of environmental protection services is considered to be an "ancillary"
activity which is not shown as separate output of the respective establishments
in Table 2. The cost value of ancillary services is identified separately, however,
in Table 3 as the total of intermediate consumption (17.9), consumption of fixed
capital (4.8), compensation of employees (8.7) and net indirect taxes (0.3). These
costs are balanced by a negative operating surplus (-31.7). It is not proposed to
"externalize" the internal environmental protection activities within the SEEA
in order to maintain close linkage with the SNA. For more comprehensive analyses
of environmental expenditures and operations, ancillary activities could be exter-
nalized in supplementary tables.
The supply of products is disaggregated in Table 2 according to the three
categories of natural growth products, external environmental protection services
and other products only. A further breakdown of these categories needs to be
developed, as far as possible in terms of the Central Product Classification (CPC)
(United Nations, in prep.).
 TABLE 1
SYSTEMFOR INTEGRATEDENVIRONMENTAL AND ECONOMICACCOUNTING(SEEA)
(Summary presentation)

L
L Tangible assets (Table 1.3)
CO
Produced
Non-Produced
Except Natural Natural
Natural (biota) Assets

Opening Stocks (Market Valuation) 991.3 83.1 1744.4

+(plus)

Capital Accumulation

Produced Assets Rest of the World

Domestic Final Consumption Non-Produced
Use/Value added Production Except Natural Natural Exports/ Flow of
(Table 1.2) Total (Industries) Households Government Natural (biota) Assets Imports Residuals

Use of products 591.9 224.0 175.0 42.5 68.0 1.4 7.3 73.7
Gross Domestic Product (GDP) 293.4
 Consumption of fixed capital 26.3
Net Domestic Product (NDP) 267.1
Use of natural assets -1.6 59.8
(ecological valuation)
Environmental adjustment of 22.2
final demand
Environmentally Adjusted 185.1
Net Domestic Product (EDP)

+(plus)

Supply/Origin (Table 1.1)

Supply of products 591.9 517.4 74.5
Origin of residuals -1.6 -1.6

Adjustment of natural assets accumulation to market valuation

e Other volume changes (market valuation)
$ Revaluation due to market price changes

= (equals)

Closing Stocks (Market Valuation) 1149.1 93.8 2165.5

 TABLE 2
SUPPLY/~RIGIN

Domestic Production (industries) Imports

Other industries

External Internal
Environmental Environmental
Protection Protection Other
Total Activities Activities Activities Products Residuals

(1) Supply of products (goods and services) 591.9 36.2

(1.1) Natural growth products 40.7
(1.2) External env. prot. services 36.2 36.2
(1.3) Other products 515.0
(2) Origin of residuals -1.6

C Total supply [( 1) + (211 590.3 36.2 481.2 74.5 -1.6

 Natural growth products of agriculture, forestry and fishing (40.7) refer to
those growth-based outputs that are controlled by human activities and can thus
be considered as part of planned economic production. Natural growth in these
products is treated as primary production which increases the stocks or fixed
assets by the amount of growth taking place during the accounting period. On
the other hand, those primary natural growth-based products that are largely
harvested from the non-controlled natural environment (without human interfer-
ence in the growth process, such as hunting, gathering of wild fruits, deep-sea
fishing or the exploitation of tropical forests) are considered as either "free"
inputs or, in case of "scarcities," as environmental depletion costs (see below,
section 4) of the agriculture, forestry and fishing sectors. For example, in the
case of free supply of fish to the fishing industry, the sector's output would not
consist of live fish, but rather of fish landed and sold in the market-place.

The use/value added table (Table 3) shows the use of products and (man-
made as well as natural) assets as inputs of the domestic production activities
or as components of final demand (final consumption, capital accumulation,
exports). These data are supplemented with information on the value added of
the different production activities. The use table is an instrument to distribute
the total supply of goods and services from the supply table to its various
destinations. However, the supply of environmental assets is not displayed in the
supply table, but is shown as negative entries in the natural non-produced assets
column of capital accumulation. In comparison to the traditional framework of
the SNA, the use of natural assets is shown in additional rows and the capital
accumulation of non-produced natural assets in an additional column.

(a) Use of Goods and Services

The first block of rows in Table 3 presentsithe use of products (goods and
services) by intermediate consumption of economic activities and final demand,
as supplied from Table 2 (591.9). This corresponds to the traditional use table
in the SNA. The sum of the gross value added (293.4), the conventional
Gross Domestic Product (GDP), is shown explicitly in Table 3. Subtracting
the consumption of fixed capital obtains the Net Domestic Product (NDP)
(267.1).
As indicated in section 3, the supply of natural growth products (40.7) stems
from "controlled" production processes of agriculture, forestry and fishing only.
These products are used as inputs into different economic activities (23.0),
exported (5.0), consumed by private households (11.3), or may increase fixed
capital or stocks (1.4). Stock increase results from the growth in products which
are not used in the same period. Stock decrease is shown where naturally grown
products of a former period are used for intermediate or final purposes. The
increase of fixed capital on the other hand represents a growth in the remaining
biomass that is not intended to be used up in intermediate or final consumption,
 TABLE 3

Domestic Production (industries)

Other Industries

External Internal
Environmental Environmental Subtotal
Protection Protection Other Domestic
Total Activities Activities Activities Production

(1) Use of products

(1.1) Natural growth
products
(1.2) External envir.
protection services
(1.3) Other products
Gross value added of
industries [(9)-(l)]

(2) Use of produced

fixed assets
(consumption of
fixed capital)
Net value added of
industries [(9)-(1)-(2)]

(3) Use of natural assets

(ecolog. valuation)
(3.1) Quantitative
depletion
(3.2) Degradation of land
(except by residuals)
(3.3) Degradation by
residuals
C Total use [ ( I ) + (2) + (3)]
(4) Environmental
adjustment of
final demand
Env. adj. net value
added (EDP) of
industries
[(9)-(1) -(2)-(3)-(4)
or (5)+ (6)+(7)+ (811

(5) Compensation
of employees
(6) Indirect taxes
minus subsidies
(7) Net operating surplus
(8) Eco-margin [-(3) - (4)]

(9) Total gross inputs/total

total final demand
[(1)+(2)+(3)+(4)+(5)
+(6)+ (7)+ (811
 Final Demand

Final Consumption Net Capital Accumulation Exports

Produced Assets
Non- Sub-total
Except Natural Produced Final
Households Government Natural (biota) Assets Products Residuals Demand
such as the trunks and branches of fruit trees or the breeding stock of live~tock.~
External environmental protection services (36.2) are used for avoiding
potential or restoring actual decreases in environmental quality. It is assumed in
the numerical example that the environmental protection services of the govern-
ment which are not sold on the market (government consumption: 5.0) are
restoration activities whereas the other environmental protection activities (31.2)
are avoidance activities and are bought by industries (22.4) and households (8.8).
Environmental protection activities of the government for avoiding environmental
degradation caused by its own production are assumed to be part of the internal
environmental protection activities. Government environmental protection ser-
vices services sold in the market are assumed to be intermediate consumption of
industries or household consumption.
The other products (515.0) are used for intermediate consumption (178.6),
final consumption (192.4), capital accumulation (75.3) and exports (68.7).

( b ) Use of Natural Assets

Integrated environmental-economic accounting in the present framework
focuses on the inclusion of costs, resulting from the quantitative depletion of
natural resources and from the qualitative degradation of environmental quality
by economic activities.
Depletion activities (at a total of 18.2) are shown in Table 3 to consist of
depletion of natural assets by industries (17.5) and by households (0.7). As
detailed in Table 5, they comprise the exploitation of natural resources such as
sub-soil assets (mineral deposits) by mining and quarrying (-8.9), aquifers (-4.7)
and biological assets (e.g. timber from tropical forests or fish stocks of inland
and marine waters) by agriculture, forestry and fishing (-0.9, -3.7). The assump-
tion is that scarcities in the availability of renewable (forest, fish, wildlife etc.)
and cyclical (water) resources have been observed. Depletion costs are only
estimated in these cases as far as the economic use of natural assets leads to
imbalances in nature, i.e. if the depletion of biota exceeds the natural growth or
the use of water exceeds replenishment of aquifers. The recording of correspond-
ing negative amounts of tangible wealth reduction is discussed below in section
4d.
The other category of economic use of natural assets represents the environ-
mental quality degradation of the environmental media of air, water and land
by production and consumption activities. The degradation of land could be
caused by improper agricultural practice (soil erosion, water logging, saliniz-
ation), by excessive use for recreational purposes or by polluting the soil with
wastes or waste-water. The main reason for degrading the quality of air and water
is their use as a sink for residuals (wastes, pollutants) of economic activities. It
has to be stressed that only the immediate influence on the environmental media
is taken into account. The indirect effects by transboundary transport in the air
or by transition from one environmental medium to another are not recorded in

h his treatment of natural growth processes in agriculture, forestry and fishing differs from the
1968 SNA recommendations, but may be adopted in the revised SNA.
the SEEA. These complex dynamics within the natural environment could be
shown in supplementary data systems which should be linked with the SEEA.
Furthermore, it should be noted that impacts of natural or man-made disasters
are assumed not (or in some cases only indirectly) to be caused by economic use
of environmental assets and are therefore excluded from the uselvalue added
Table 3 but are included as a category (4) of asset volume changes in Table 5.
The net value of degradation is assumed to be equal to potential abatement
(restoration) costs, required either to achieve the level of environmental quality
at the beginning of the accounting period or at least a level specified by "official"
environmental standards (Hueting, 1980). It is assumed that such standards reflect
a technological solution to abating environmental quality degradation that can
"reasonably" be expected to be applied by the different polluters. Obviously,
such valuation does not measure actual environmental "damage" from pollution.
A possible treatment of such welfare effects is discussed in section 5.
The environmental degradation is caused by production activities (9.0 plus
33.3), by consumption activities of households (0.8 plus 15.6), by man-made
assets (5.1) and by imported residuals (1.6). Man-made assets have an effect on
the natural environment by their residuals (e.g. scrapped machinery). A part of
the environmental degradation is restored by government activities (-5.0). The
remaining degrading impacts affect the domestic natural assets (-9.8, -45.9)
and-as far as residuals are "exported"-the natural environment of the rest of
the world (-4.7).
In Table 4, the value of the economic use (depletion as well as degradation)
of domestic and non-domestic (foreign) natural assets and the corresponding
impacts on the asset values are shown in a simplified balance sheet.

TABLE 4
ECONOMICUSE AND IMPACTSON NATURALASSETS

Use of Natural Assets Impacts on Natural Assets

(environmental costs) (decrease of asset values)

Domestic use Domestic environment

Depletion Depletion
industries 17.5 prod. natural assets 0.9
households 0.7 non-prod. natural assets 17.3

Degradation Degradation
industries 42.3 non-prod. natural assets 55.7
households 16.4
government -5.0
prod. assets 5.1

Environment of the
Imports rest of the world
Degradation 1.6 Degradation 4.7
- -
60.4 60.4

78.6 78.6
(c) Environmental Adjustments of the Value Added
Deducting the imputed costs of natural asset use (environmental costs) from
net value added leads to a new value-added concept, termed here "environ-
mentally adjusted net value added." The environmental costs represent the
hypothetical costs for maintaining the natural assets at the same level during the
reporting period. This concept reflects a "strong" or "narrow" sustainability
concept which implies that future generations should receive a natural environ-
ment with a quantitative and qualitative level being at least comparable with the
present situation (Bartelmus, in preparation; Blades, 1989; Daly, in preparation;
Pearce, Markandya, Barbier, 1989 and 1990; and Pezzey, 1989). The international
discussion of the last years has proved that it is not sufficient to sustain a constant
level of total (man-made as well as natural) capital, denying substitution
possibilities between these capital categories ("broad" or "weak" sustainability
concept). The uncertainty of long-term impacts of economic activities on the
natural environment and the increasing knowledge about irreversible damages
of natural balances (climate change, ozone layer depletion etc.) has led to a more
cautious risk-conscious attitude towards overburdening the natural environment.
From this point of view, it seems necessary to maintain the natural assets treating
them as complementary to man-made capital. The strong sustainability concept
thus applies not only to the case of environmental quality degradation, but also
to the maintenance of "stocks" of natural resources. In the case of subsoil assets,
this approach seem to be questionable because the strong sustainability concept
would lead to non-use of the resources, possibly causing severe world-wide
economic problems. Instead, the objective could be to maintain a long-term
optimal depletion rate, considering that new finds could only retard the shrinkage
of the stocks. It has been proposed that the sustainability concept should be
weaker in this case, and it would be sufficient to balance a decrease of the subsoil
assets with an increase of other types of assets (with preference for permanent
or renewable natural assets) to sustain the same income level in the future (El
Serafy, 1989; Daly, in preparation).
The maintenance cost approach used for valuing the economic use of natural
assets corresponds to the methods of national accounting for estimating the use
of man-made fixed assets. The user costs of these assets are estimated with the
costs necessary to keep the man-made fixed capital intact, i.e. to maintain the
level of the assets at the same level during the reporting period. These costs which
are called "consumption of fixed capital" or "depreciation" are also used to
compile the net capital formation of the man-made assets in the accounting period.
As far as the natural assets have the character of jixed assets, treating the
maintenance costs of natural assets in the same way as the depreciation of
man-made assets seems plausible. However, distinguishing between assets that
bear characteristics of fixed assets and those that are more in the nature of an
inventory or stock (in this case, decrease of assets in the national accounts is
booked as intermediate consumption and not as depreciation) is problematic
because natural assets may exhibit simultaneously economic and environmental
functions (Hueting, 1980). For instance, a timber tract represents a stock resource,
but has also an important role in cleaning the air and regulating water balances.
 Furthermore, it serves as habitat of animals and as recreational area. From an
ecological point of view, the environmental media, i.e. land, water and air as
well as the ecosystems can be considered as fixed assets. The maintenance costs
of these assets should therefore be treated as depreciation. Further discussion
seems to be necessary in the case of subsoil assets. They mainly have the character
of inventory stocks of nature. Their depletion could therefore be treated as
intermediate c o n ~ u m ~ t i oFor
n . ~sake of simplicity of the present framework, the
value of the depletion of these assets is not shown separately from the other
environmental costs, but is also treated as decrease of a fixed asset.
Whatever the treatment of the environmental costs, as depreciation of natural
assets or as intermediate consumption, their deduction from gross output affects
the calculation of net value added. The gross value added of the industries remains
unchanged in the SEEA. The environmental adjustments of the net value added
(-82.0) comprise the imputed environmental costs connected with domestic
production (-59.8), household consumption activities (-17.1) and the use of
man-made assets (-5.1). These adjustments are called eco-margin which is
introduced explicitly in order to permit the identification of all components of
value added (including operating surplus) according to the conventional SNA
concepts.
Impacts of household activities and of man-made assets on environmental
quality are taken into account for correcting the net value added despite the fact
that the respective environmental costs are not directly associated with production
activities. Regarding households, their polluting activities could be viewed as
non-market production of goods and services which produces "jointly" residuals
like wastes and pollutants. In this case, the net value added of the households'
production would be diminished by the imputed environmental costs of the
households. This is achieved by shifting these imputed values (17.1) from final
consumption to the totals of domestic production. A similar correction is made
with regard to the environmental impacts of man-made assets, comprising addi-
tional imputed costs of the asset owners (5.1). These costs refer e.g. to pollution
caused by controlled landfill and to the residues of unrecycled man-made assets.
It is theoretically possible to transfer these costs to the different industries. In
this case, their net value added would directly be affected. This procedure has
not been applied in the SEEA in order to show separately the environmental
costs caused by current production and man-made capital use. The shift of the
environmental costs of households and man-made assets to the columns of
domestic production is shown in Table 3 in the row "environmental adjustments
of final demand." Net value added is thus corrected only for the totals of
environmental protection activities (1.8 and 2.1) and of other activities (18.3).

In Table 3 we also record the components of value added, consisting of the

compensation of employees, indirect taxes net of subsidies, net operating surplus
and environmental costs equal to item (8) "eco-margin." Use of SEEA thus
permits the analysis of these components of value added for the environmental

3See El Serafy (1989). However, the total depreciation approach is advocated by Harrison (1989)
and Repetto (1989).
protection activities of the different economic sectors. Indirect taxes and subsidies,
charged or granted as part of environmental protection policies, will be identified
separately in the SEEA, reflecting the application of polluter- and user-pays-
principles at the micro-economic level. Macro-policy makers on the other hand,
might be concerned with the assessment of employment devoted to "defensive"
environmental protection activities (total "environmental" renumeration of
employees of 21.7 as compared to a total of other wages and salaries of 72.0).
The net operating surplus of the different production activities has not been
environmentally adjusted in Table 3. The additional environmental costs are
balanced by introducing the eco-margin. The idea is to facilitate the unequivocal
linkage of the production accounts of the SEEA with the income accounts of the
conventional SNA. Another possible presentation of the operating surplus could
show an environmentally adjusted net operating surplus, but extend the table at
the same time for identifying explicitly the non-adjusted gross and net operating
surplus:
Environmentally adjusted net operating surplus 55.0
= Gross operating surplus 163.3
-Consumption of fixed capital 26.3

The total of the environmentally adjusted net value added is called Environ-
mentally Adjusted Net Domestic Product or, short, Eco Domestic Product (EDP).
EDP could be derived from GDP as follows:
Gross Domestic product (GDP) 293.4
-Consumption of fixed capital 26.3
= Net Domestic Product (NDP)
- (Imputed) environmental costs 82.0
= Eco Domestic Product (EDP) 185.1

(d) Final Demand

Final demand consists of final consumption, net capital accumulation and
exports. Import and export flows are only slightly modified for environmental
accounting. However, significant alterations are proposed for both final consump-
tion and net capital accumulation to allow corrections of net value added while
heeding the principle of accounting identities (see below, section 4e).
Imports and exports include flows of wastes which are not marketed, but
transported to/from a foreign country or to the open sea. They represent either
a degradation of the foreign natural media by exporting domestic residuals or
of domestic media by importing residuals. They are estimated as negative values-
costs for avoiding or restoring environmental quality degradation (exports: -4.7,
imports: -1.6). The imports of residuals reduce the total value of imports and
of the domestic natural assets (negative item in the column of net accumulation
of natural assets). The exports of residuals lead to an increase of the imputed
environmental costs of the exporting industry which implies a reduced environ-
mentally adjusted net value added of the exporting economic units and a reduction
of the total value of the exports. Transboundary flows of residuals of the economic
activities which are not transported by man but by environmental media (e.g.
water, air), are recorded as degradation of the environmental media which directly
receive the residuals. Their final destination is not taken into account.
The conventional final consumption of households (175.0) remains
unchanged in the SEEA. The additional (imputed) environmental costs (17.1)
which would have been necessary to avoid or which need to be incurred in order
to restore a degradation of environmental quality by household activities (rec-
reational use of land 0.8, pollution 15.6), or which represent the costs of depleting
natural resources (firewood consumption 0.7) are shifted to domestic production.
The fully elaborated SEEA will comprise a further breakdown of the final
consumption of households by environmentally oriented functions for identifying
e.g. the environmental protection expenditures of the households and the expen-
ditures required to compensate for the damages caused by environmental deterior-
ation (health expenditures etc.).
Final consumption of government (42.5) is corrected by the environmental
protection expenditures (-5.0) which are non-marketed and which are undertaken
to avoid or restore a decrease of environmental quality caused by other economic
units. These expenditures have the characteristics of an investment in environ-
mental quality. Its value is shifted from the government final consumption to the
capital accumulation of natural assets and diminishes the degradation of the
natural assets which would have occurred if no restoration activities had taken
place. The environmental protection activities of the government for own purposes
(internal activities) and the additional (imputed) environmental costs of the
government production activities are already recorded in the columns of domestic
production. It is therefore not necessary to extend the concept of final consump-
tion of government in the SEEA by taking into account imputed environmental
costs.
The section on the net accumulation of tangible wealth in Table 3 differs
considerably from the traditional incorporation of capital formation in a use
table. The presentation of this part of final demand in Table 3 is limited to an
asset classification by only three types of asset: produced biological (natural)
assets, other produced assets, non-produced natural assets. A further breakdown
of the capital accumulation is given in Table 5 which shows complete asset
balances for the different types of assets. The following comments refer especially
to the disaggregated version in Table 5. The capital accumulation concept
of Table 3 corresponds to the (traditional) capital formation (item 2 of
Table 5) and to the ecological valuation of volume changes of natural assets
due to economic use (item 3.1 of Table 5). The valuation problem (market
versus ecological valuation) and the other items of Table 5 are discur,2c' in
section 5.
In the SEEA, the asset boundary has been extended for including all natural
assets which are actually or potentially used by economic activities or which
could be affected by the residuals of economic production and consumption
129
 TABLE 5

Monetary units

Produced Assets Non-produced Natural Assets

Land (landscape,
Produced ecosystems)
Assets Produced Non-produced
(except Biological Biological Cultivated Sub-soil
Total biological) Assets Assets etc. Uncultivated Assets Water Air

(1) Opening stocks (market values)

(2) Net capital formation
(use of products, market values)
(2.1) Gross capital formation
(2.2) Consumption of fixed capital
(3) Volume change of natural
assets due to economic use
(market values)
(3.1) Ecological valuation
(3.1.1) Quantitative depletion
(3.1.2) Degradation of land
(except by residuals)
(3.1.3) Degradation by
residuals
 (3.2) Adjustment due to market
valuation
(3.2.1) Quantitative 8.1
depletion
(3.2.2) Land use (except 35.2 33.1 2.1
by residuals)
(3.2.3) Degradation by 38.8 4.0 1.5
residuals
(3.3) Other volume changes 27.8 3.4 -3.4
(change of land use,
new finds, new estimates etc.)
(4) Volume change by natural or -30.3 -25.3 1.3 -4.3 -2.0
multiple causes
(market values)
(5) Revaluation due to market 533.5 138.1 12.6 11.1 331.0 11.8 28.9
price changes

(6) Closing stocks (market values) 3408.4 1149.1 93.8 75.7 1721.3 55.2 313.3
L
W
[(1)+(2)+(3)+(4)+(5)1
u
processes. The extended asset concept comprises the following types of assets:

Produced assets
Man-made assets (non-biological such as
machinery and equipment, stocks of non-biological products)
Natural assets produced by agriculture, forestry and fishing (fixed assets
and inventory stocks)
Non-produced natural wild assets
Wild biological assets
Land (cultivated and uncultivated)
Subsoil assets (developed and undeveloped proven reserves)
Water (stored and unstored)
Air
This classification distinguishes in particular between assets which are (economi-
cally) produced or not and which are man-made or natural. These two criteria
are not identical because the (economically) produced biota are both produced
and natural. In this case, the produced biota should only be subsumed under
natural assets as far as they are living. A further breakdown is possible according
to the degree of human influence on the natural environment (e.g. cultivated-
uncultivated land, developed-undeveloped subsoil assets).
In Table 3, the net capital accumulation of produced assets is recorded mainly
according to the conventional concepts of the SNA (gross capital formation: 68.0
and 1.4, consumption of fixed capital: -23.0 and -3.3). Only two minor deviations
should be mentioned: The residuals of the produced assets which are loaded on
the natural environment (e.g. scraps, pollution of controlled landfill) are valued
with their avoidance costs (5.1) and shown in addition to the net capital formation.
In a second step, these imputed costs are shifted to the industries ofthe responsible
activities or, alternatively, to the industries as a whole [via the environmental
adjustment row (4)]. In the case of produced biological assets, it' might be
necessary to estimate additional depletion costs (-0.9) if the economic activities
of agriculture, forestry and fishing disturb the natural balances, e.g. if the amount
of cut wood exceeds the natural growth and destroys the ecosystems of cultivated
forests. In this case, the sustainability principle should be applied, and avoidance
or restoration costs could be calculated.
The imputed depletion costs of wild biota (in Table 5 : -3.7) are estimated
only if depletion by economic activities (e.g. hunting, ocean fishing) and natural
growth are not balanced. Depletion costs are thus estimated if depletion exceeds
natural growth. The discussion of valuation of net depletion in this case has not
been conclusive. One possible approach could be to value net depletion as the
gross value added generated by the depleting activity. This would show value
added foregone if the net depletion had been avoided. Another approach could
be to assess the costs for compensating projects to restore the natural balances.
Net capital accumulation of land refers to the impacts of economic land
use. The costs of developing land are treated in the conventional SNA as capital
formation which normally leads-from an economic point of view-to an
improvement of land quality and to increasing market values (in Table 5: 4.6).
From an ecological point of view, increasing economic use of land could cause
a qualitative degradation of the land and the terrestrial ecosystems. The main
reasons are restructuring (further economic development of cultivated land,
cultivation of uncultivated land), intensive agricultural use (soil erosion etc.),
recreational use (disturbing ecosystems) and use as a sink for residuals (such as
pesticides and the pollution of controlled and uncontrolled landfill). In Table 5
degradation by residuals (-9.5 and -3.1) and by other economic activities (-7.7
and -2.1) are distinguished.
The degradation of land is valued as the cost to avoid (or at least mitigate)
the negative impacts of economic activities or to restore the degraded areas, with
a view to maintaining the terrestrial ecosystems in their present state. This
valuation concept might differ widely from the market valuation. Changes in
economic land use will often increase the market value of land, but at the same
time could imply a decrease of the ecological quality of land.
Subsoil assets comprise the proven reserves of fossil and mineral assets.
Proven reserves normally have to meet three criteria: high probability of existence
(95 percent), exploitability with existing techniques and positive net return, i.e.
the market price exceeds exploitation costs (Martinez et al., 1987). Subsoil assets
can be undeveloped or developed (established mines and other exploration
facilities). The costs for developing subsoil assets (e.g. by exploration activities)
have to be treated according to the conventional SNA as capital formation (Table
5: 2.7). The valuation of the depletion of subsoil assets has to reflect the future
scarcity of the assets. Exploitation is mainly an economic and not an ecological
problem because the immediate impacts on natural balances are usually low,
with the notable exception of surface mining. The indirect impacts of subsoil
depletion (e.g. losses of crude oil during transportation, pollution connected with
energy consumption) are registered independently from the valuation of assets
as environmental degradation from polluting economic activities.
Various methods have been proposed to value subsoil asset depletion (see
Ward, 1982). Several authors suggest the use of the net operating surplus of the
exploiting industry or a part of it. The proposal of El Serafy (1989) seems to be
an approach tailored to the concept of sustainability. The idea is to estimate the
depletion costs as the amount of money which should be invested to achieve a
long-term constant flow of income, even after complete exploitation of the
resources. This rule implies a substitution of the use of subsoil assets by other
types of income generating activities and corresponds to a broad sustainability
concept. The decrease of subsoil assets could be balanced, e.g. by increasing
renewable (biological) assets or by the development of solar and wind energy
sources instead of coal or crude oil. The value of subsoil depletion amounts to
8.9, in Table 5.
The economic use of water could lead to increasing scarcity (depletion) or
to decreasing quality (degradation by residuals). Increasing scarcity of water will
be observed if the economic abstraction exceeds the average natural inflow of
water during the accounting period. In this case, net depletion could be valued
as the value added, or part of it, generated by additional water use of the
abstracting industries (-4.7). This value could represent the avoidance costs as
in the case of wild biota. Further discussion is necessary to develop a generally
accepted valuation method for water depletion. The degradation of water by
residuals is valued as its avoidance (or restoration) costs (-12.9).
As described above (section 4b), the value of the degradation of air is its
avoidance costs (-20.4).
In section 5 below, we describe a comprehensive system of balance sheets
of tangible assets, including changes in volume not accounted for by capital
accumulation in the use/value added table (e.g. effects of natural and other
disasters).

(e) Accounting Identitfes

The national accounting identities between the totals of environmentally
adjusted value added (plus imports) and final demand are maintained in the
uselvalue added Table 3 by treating capital accumulation of natural assets as
part of final demand. In Table 6 we show the transition from the conventional
aggregates, according to the SNA, to the environmentally adjusted aggregates of
the SEEA by using the numerical example (cf. Tables 2 and 3).

TABLE 6
ACCOUNTINGIDENTITIES

Primary Inputs Final Demand

(value added, imports) (domestic, exports)

Gross value added Domestic final demand

(Gross domestic product) 293.4 (SNA concept)
-Use of produced assets 26.3 -Consumption of fixed capital 26.3
(consumption of fixed capital)
-Use of natural assets 59.8 -Government restoration costs 5.0
for current production
Environmental adjustment 22.2 +Net capital accumulation of -73.9
of final demand natural assets
( - 78.9 + 5.0)

Environmentally adjusted net Environmentally adjusted domestic 189.0

value added final demand
(Environmentally adjusted Net
Domestic Product) 185.1
+Import of products 74.5 +Export of products 73.7
+Import of residuals -1.6 + Export of residuals -4.7

Environmentally adjusted primary 258.0 Environmentally adjusted final 258.0

inputs demand

As already explained, the gross value added (293.4) is corrected by the

consumption of fixed produced capital (26.3) and by the user costs of natural
assets (current production 59.8, households 17.1, residuals of man-made assets
5.1). This obtains the environmentally adjusted net value added (185.1). The
concept of imports is extended to additionally include imports of residuals (74.5
and -1.6). The total of the environmentally adjusted primary inputs (value added
plus imports) is 258.0.
 Domestic final demand (294.2) is corrected by the consumption of fixed
produced assets (26.3) to achieve a net concept. The environmental restoration
costs of the government (5.0) are treated as an increase of the value of natural
assets and therefore reflected in the capital accumulation of natural assets. The
value of depletion and degradation of natural assets by economic activities would
have been -78.9 without government restoration activities. Taking these activities
into account, the net capital accumulation amounts to -73.9 (-73.0 plus -0.9).
The environmentally adjusted figures of total final demand (258.0) comprise the
adjusted domestic final demand (189.0) and the export of products (73.7) and
residuals (-4.7). This total is equal to the total of primary inputs.

As illustrated in Table 1, the section of the use/value added table on tangible

wealth accumulation can also be viewed as an integral part of the asset balances.
This is indicated in Table 1 by plus ( + ) and equal ( = ) signs, inserted between
the four elements of the asset balances. This illustration shows an accounting
identity between the closing stocks and the sum of opening stocks, net capital
accumulation, adjustment of natural assets accumulation to market valuation,
other volume changes and revaluation due to market price changes. This identity
holds for man-made assets (produced, not natural):

for the (economically) produced natural assets:

93.8=83.1+(1.4-3.3 -O.9)+(0.9+ l2.6),
and for those non-produced natural assets which are used or affected by economic
activities:
2,165.5~1,744.4+(7.3 -73.0)+(81.2+22.8+382.8).
The asset balance sheets are further elaborated on in Table 5. The asset
classification has already been described in Section 4d. The volume and price
changes of the assets during the reporting period are further disaggregated in
Table 5, consisting of:
(2) Net capital formation (use of products);
(3) Volume change of natural assets due to economic use;
(3.1) Ecological valuation,
(3.2) Adjustment due to market valuation,
(3.3) Other volume changes (market valuation),
(4) Volume change by natural or multiple causes;
(5) Revaluation due to market price changes.
The volume changes (2) and (3.1) reflect the net capital accumulation
described in the use/value added table (Table 3 and Table 1.2), the adjustment
due to market valuation (3.2) corresponds to the "adjustment of natural assets
accumulation to market valuation" in Table 1.3. The other volume changes due
to economic use (3.3) and the volume change by natural or multiple causes (4)
are summarized under "other volume changes" in Table 1.3. The revaluation due
to market price changes is presented in both tables under the same name.
The design of the asset balance sheets aims at introducing environmental
aspects in the national stock accounts without disrupting the concepts of the
conventional SNA balance sheets. As recommended in the International Guide-
lines on Balance-Sheet and Reconciliation Accounts (United Nations, 1977) and
in chapter XI of the preliminary draft of the revised SNA (United Nations, 1990),
the opening and closing stocks are valued at market prices or have values derived
from market prices. Direct market valuation could be applied if the assets are
marketed (some produced fixed assets like cars, inventory stocks of products,
land). Indirect market valuation uses the net value concept (replacement costs
minus cumulated depreciation) or tries-in the case of depletable natural assets
like wild biota, subsoil assets or water-to estimate the assets by the discounted
value of future net returns (future market prices minus all exploitation costs
including a normal rent of capital).4 It should be stressed that the SEEA does
not aim at a complete market valuation of the non-produced natural assets. The
market valuation should be limited to natural assets which are regularly depleted
for market purposes (e.g. ocean fish, tropical wood and subsoil assets) or to
assets which are directly marketed (uncultivated land in exceptional cases). The
opening and closing stocks of the other non-produced natural assets have a
market value of zero. In these cases, their volume changes are valued only if they
are affected by economic activities.
Market valuation has also been applied in general for the volume and price
changes during the accounting period. Net capital formation of produced assets
[item (2) in Table 51 reflects the volume changes described in the conventional
SNA framework. Some of the other volume changes of assets caused by economic,
natural, non-economic and multiple (combination of these causes) activities and
events [items (3) and (4) in Table 51 which had been part of the reconciliation
accounts in the 1968 version of the SNA, will be integrated into the accumulation
accounts which explain the changes in the balance sheets of the revised SNA at
market values. Opening and closing stocks of these assets are also measured at
market values. The transition to the level of the market values at the end of the
accounting period (closing assets) is shown as item (5) in Table 5 (revaluation
due to market price changes).
The connection between the SEEA and the conventional assets balance
sheets is introduced by a breakdown of the volume change of natural assets due
to economic use (item (3) of Table 5). As far as the economic use affects the
natural balances and leads to a decrease of the value of the natural assets from
an ecological point of view, the avoidance or restoration costs are estimated for
maintaining the same qualitative and quantitative level of natural capital during
the accounting period. These values are introduced in the extended use/value
added table of the SEEA (see Table 3). This ecologically oriented valuation does
not necessarily correspond to the market values due to the respective economic
use. Therefore, an adjustment item is introduced which allows the transition to
the market valuation of the asset balance sheets [item (3.2) of Table 51. Volume
4 ~ h normal
e rent of capital refers to the produced assets which have been used for the exploitation
of natural assets (e.g. trawlers for fishing and drilling instruments).
changes due to economic activities which do not directly deplete or degrade the
natural assets (changes in land use, discoveries, etc.) are separately recorded and
have market values [item (3.3) of Table 51. In the SEEA, the analysis of the
volume changes of the natural assets is focused on the economic uses. Therefore,
no ecologically orientated valuation of the volume changes of natural assets due
to natural or multiple causes (like wars and disasters) is applied, but market
values of the volume changes are given.
It is not possible to describe the volume changes of the different types of
assets in this overview article in detail. More detail on the extended asset balance
sheets will be given in the SNA Handbook on Environmental Accounting. The
following limited observations are thus only to facilitate a better understanding
of the general scope and coverage of environmental assets in the SEEA.
The consumption of fixed capital (fixed produced assets) comprises only
insurable risks of premature losses. Further losses by war or natural disasters are
recorded under item (4) (-25.3).
The asset balances of the biological assets are relatively complicated because
of the different concepts for describing the volume changes of produced and
non-produced biota at market values. The natural growth of produced biota is
treated as economic production (and gross capital formation) whereas the natural
growth of non-produced biota is, as far as market values are associated to them,
part of "(4) Volume change by natural or multiple causes" of Table 5. The
depletion (due to economic use) of the produced biota is shown as decrease of
stocks or consumption of fixed capital [item (2) of Table 51, whereas the depletion
of non-produced biota is indicated under item (3). This different treatment implies
that the net growth (natural growth minus depletion) of produced biota at market
values is shown as net capital formation under item (2) (-1.9 = 1.4 - 3.3), while
the net growth of non-produced biota equals the difference of the values under
item (4) and item (3) (-0.8 = 1.3 - 2.1).
The ecological value of depleting produced biota (-0.9) reflects the ecological
consequences of depleting cultivated biota beyond the economic use of these
assets. If, for example, the wood of timber tracts is cut, the natural balance of
forests could be disturbed as far as depletion exceeds natural growth. The
necessary "ecological" costs could be estimated by the costs of compensating
projects or by the additional value added generated by the net depletion (gross
depletion minus natural growth). Further considerations are necessary to avoid
double-counting if the depletion of produced biota exceeds their natural growth.
In this case, the ecological valuation has to take into account that the (negative)
net growth has already been valued at market values as (negative) capital
formation.
The depletion of wild biota (-3.7) could be valued in ecological terms in a
similar way. The natural balances could only be maintained if depletion and
natural growth are balanced. That is, if the net depletion is positive avoidance
or restoration costing refers to a reduction of the production (hunting, harvesting
etc.) and a decrease of the corresponding value added, and the loss of ecological
functions of the resource.
The valuation of the quality changes of land caused by economic activities
might produce completely opposite results, depending on the economic or
 environmental point of view. Restructuring and development of land are normally
connected with increasing market values, whereas their ecological effects could
decrease the land values under environmental aspects. The development costs
(4.6) are shown as capital formation. They reflect, together with the market value
of the volume changes due to economic use (23.3, -5.0), the market value of all
quantitative and qualitative volume changes of land caused by the different
economic activities. The quantitative aspects of land use (changes in land use)
are described under item (3.3) of Table 5 (3.5, -3.4). The qualitative component
is shown under ecological aspects first (-7.7, -9.5, -2.1, -3.1) and adjusted to
market valuation in a second step (33.1, 4.0, 2.1, 1.5). The qualitative changes
do not only comprise the results of restructuring and development, but also
excessive economic use, e.g. for agricultural purposes (often connected with soil
erosion) and for recreation. Furthermore, the degradation by residuals is taken
into account.
The ecological valuation of land degradation raises difficult estimation prob-
lems. In principle, the adequate avoidance or restoration costs to maintain the
same level of land quality has to be estimated. Avoidance costs could comprise
the decrease of value added in case of reducing excessive land use. Restoration
costs could be the costs of compensation projects.
The opening and closing stocks of subsoil assets (proven reserves: developed
and undeveloped) are valued with the discounted value of future net returns (i.e.
revenues minus exploitation costs: 261.9, 313.3). New discoveries and changes
in the economic conditions of exploitation which lead to new estimates of the
proven reserves, are shown under item (3.3) of Table 5 (27.8). The exploitation
costs do not contain the exploration costs (2.7) because they have already been
included under item (2) of Table 5. The extraction (depletion) of these assets is
estimated at "ecological" values (-8.9) and in a second step adjusted to market
values (-8.9+0.9 = -8.0). These market values reflect the net prices of the
depleted assets (current market price minus exploitation costs). The ecological
valuation could comprise the costs for maintaining the level of natural capital
(compensating projects to develop renewable or permanent assets) or of the total
capital (man-made and natural).
The stock of water has normally no market values. Exceptions are stored
water for drinking or irrigation purposes. The depletion of water is valued from
an ecological point of view only if the average water stock is affected. This net
depletion is valued with its avoidance costs [costs of reducing water use, e.g. by
reducing agricultural production (-4.7)]. The avoidance cost approach can also
be applied for valuing water degradation by residuals (-12.9).
The air, as a natural asset, has no market value. Therefore, the value of
opening and closing stock is zero. For balancing the value of degradation by
residuals (-20.4), a corresponding positive item has been introduced as an
adjustment to market valuation.

6. WELFARE-ORIENTED MEASURES OF THE ECONOMIC USE OF

THE ENVIRONMENT

The concept of sustainability used in this paper is cost-oriented rather than

welfare-oriented.' It reflects cost estimates which would be necessary to avoid,
restore or replace decreases of environmental quantities and qualities during the
reference period. Such an approach would normally suggest a greater effort at
protecting the environment, as compared to estimating an economically optimal
level of pollution. Optimality would require a balance of marginal costs of
protection activities and of the (discounted) flows of marginal future environ-
mental damages avoided. Because of underestimation, uncertainty and undervalu-
ation (high discounting) of future damage, the optimality criterion will almost
certainly present an amount of environmental deterioration which might be
optimal from a micro-economic point of view, but not from a social point of
view. In view of the uncertainties related to individual (marginal) evaluation and
of prevailing societal and international concerns over long-term threats to critical
life-support systems, the cautious concept of sustainability implicit in the cost
values of the present framework, i.e. the maintenance (non-decrease) of environ-
mental quality, appears to be a realistic approach. Under this aspect, the present
cost approach also reflects (social) welfare aspects in its valuation of environ-
mental degradation. Theoretical considerations, recently presented by Pearce,
Markandya, Barbier (1990, especially p. 9), seem to support this approach.
Measurement and valuation problems of estimating the consequential
damage (welfare losses) caused by environmental degradation are formidable.
It is also difficult to associate unequivocally particular pollutants with health and
welfare effects (for example, health damage caused by air pollution). One
approach proposed to assess damage costs is to measure actual expenditures
required for the elimination of the damage (Uno, 1989). Such expenditures could
be shown separately in the SEEA as possible deductions under welfare aspects
(Leipert, 1989). Another approach is to directly estimate health and welfare
losses, including the impairment of recreational functions or aesthetic and ethical
aspects of the environment. Some of these losses have been estimated by using
the willingness-to-pay approach as an approximation of individual ("revealed")
preferences or by other methods of contingent valuation (see OECD, 1989). Once
comprehensive estimates of the value of damages become available, research
projects could be undertaken to associate them with the polluting sectors. In this
case, separate accounts should be established, which would allow a comparison
of the actual and hypothetical avoidance cost on one hand and of the actual and
imputed damage costs on the other. These comparisons would facilitate macro-
economic cost-benefit analyses, as proposed for example by Peskin (1989). Such
additional accounts would permit further modifications of the components of
final demand for the derivation of welfare-oriented measures (Bartelmus, 1987).
In the SNA Handbook on Integrated Environmental and Economic Accounting,
an approach will be discussed which could be derived from the cost-oriented
measures of the SEEA by extending not only the asset boundary, but also the
production boundary. This implies the introduction of the concept of environ-
mental services "produced" by nature (see Peskin, 1989; Schafer and Stahmer,
1989; and Stahmer, 1990).

'The question of welfare-oriented measures in national accounts is discussed in Drechsler (1976)

and United Nations (1977a). The limits of accounting approaches to assets, the sustainability of
economic growth, and possibilities of modeling the "feasability" of development programs are
discussed in Bertelmus (in preparation).
 The environmentally modified concepts developed in the framework should
stimulate alternative economic analyses and policies, based on an integrated
assessment of environment-economy relationships. One aspect of such analysis
is to focus on income available for spending on final consumption and new
investments. Due to the consideration of environmental costs of production,
environmentally adjusted income would generally be lower than income derived
in traditional accounting. This welfare aspect of environmental accounting
has received most of the attention in environmental studies of income and
expenditure.
On the other hand, production cost and tangible asset and resource require-
ments of production reflect a productivity aspect of economic performance and
environmental-economic analysis. Environmental accounting may result in values
of value added generated and tangible assets used in each sector, that are different
from the values of income and capital in traditional accounting. The reasons are
the inclusion of cost due to environmental uses and of non-produced natural
assets in broader concepts of cost and capital, respectively. Changed relations
between value added and economic assets used in production might well lead to
considerable re-assessment of the rentability and productivity of economic sectors
from an environmental (accounting) point of view.

(a) Economic and Environmental Features of Country X

This analysis is done on the basis of an illustrative database, developed for
the clarification of the above-described environmental accounting concepts and
procedures. Only part of this database is reflected in Tables 1 to 5 above. The
data describe the economic and environmental features of a realistic, but fictitious
country "X" and are thus to a large extent fictive. There is however a basic core
of data which was taken from the national accounts of an existing country. These
core data include GDP by activity and expenditure categories, compensation of
employees, indirect taxes (net of subsidies), operating surplus, output, intermedi-
ate consumption, capital formation and the consumption of fixed capital.
All other national accounts data, included in the framework, are elaborated
on the basis of assumptions about the type of country, the circumstances under
which traditional GDP is being generated in production, the effects of production
on the environment, and environmental protection and response carried out by
government, enterprises and individuals. These assumptions permit the break-
down of aggregate economic data which are part of conventional national
accounts, but which could not be compiled from original data sets. Further
assumptions about the environmental conditions of the country were made to
obtain environmental data for calculating the environmentally adjusted concepts
of income and expenditure.
The economic and environmental features of the fictive country X, as reflected
in the data and assumptions, are described in the following. The country is a
developing country with oil resources, agricultural production, exploitation of
timber resources, and fishing activities in rivers, lakes and ocean.
(i) Tangible Wealth
Fixed assets consist of buildings, machinery and equipment, roads and other
public structures, and also of livestock for breeding, draught and dairy, trees in
orchards and grapevines in vineyards. As regards land, the assumption is that it
is used mainly in agriculture for the cultivation of crops and rearing of livestock,
in other services for dwellings and office buildings, and that it is owned as
infrastructure by government (roads, dams and other structures).

(ii) Environmental Protection

Environmental protection activities are carried out in the country by all
sectors. They are concentrated, however, in three sectors which are selling protec-
tion services: (a) "other services" which provide private waste disposal services,
environmental consulting and recycling; (b) government, which provides sanita-
tion services, and (c) trade and transport, which transports wastes to dumping
areas and treatment and recycling plants. The environmental protection (sanita-
tion) services offered by the government are sold to a very limited extent, the
rest is assumed to be used by the government itself. The value of the cleaning
activity is assumed to be equal to the cost (5.0). Households also purchase
environmental protection services. These purchases (8.8) are presented as expen-
diture in the column of "household final consumption" in Table 3.

(iii) Mining Exploitation

The value of the mineral deposits of the country consists in particular of the
value of oil reserves (opening stock in Table 5: 261.9). New deposits of oil were
found as a result of exploration activities. This is presented in Table 5 as "Other
volume change" (27.8), exceeding the amount of depletion (-8.9f0.9).

(iv) Natural Growth

The country has an important agricultural sector, a fishing industry which
operates in rivers, lakes and the ocean, and timber tracts where wood is cut and
replanted in a controlled exploitation activity. There are also minor wood collec-
tion activities in rural areas which are not controlled by any permits.

(v) Natural Disasters

During the period of accounting, the country suffered from a major
earthquake which destroyed some of its infrastructure, particularly affecting roads
owned by the government, machinery and equipment in the manufacturing sector,
and dwellings and other buildings that are recorded as capital of the other service
sector. The total value of destruction is included in Table 5 ("Volume change by
natural or multiple causes:" -25.3).

(vi) Pollution
Pollution effects as a result of economic activities in the country are recorded
in Table 3 in the row corresponding to qualitative degradation of land, water
and air by residuals. In the case of air and water pollution, it is assumed that
not only the domestic air and water were affected, but also those of neighboring
countries (-4.7). Private households also cause pollution, which is assumed to
consist of the effects of accumulated and illegally discharged wastes. The cost of
this pollution (15.6) is reflected in the intersection of qualitative degradation by
residuals and the household consumption.

(vii) Conversion of Tropical Forest to Commercial Use

Tropical rain forests are being converted to a limited extent to land for
agriculture, urbanization and industrial development. This is recorded as change
of land use in Table 5 (k3.4).

(b) Comparative Analysis of the Economic Conditions of Country X, based on

National and Environmental Accounts
In Tables 7 and 8 we compare aggregates and indicators from traditional
accounting with corresponding ones in environmental accounting. NDP is the
main concept of national accounting and EDP is used as the environmental
accounting alternative.
TABLE 7
ANALYTICAL
MEASURESIN TRADITIONAL
AND ENVIRONMENTAL
ACCOUNTING:
RESOURCESAND USES

Based on:
Percentage
NDP EDP Difference
(1) (2) (2)-(1)/NDP

Income/expenditure 267.1 185.1 -3 1

Final consumption 217.5 212.5 -2
% of final domestic uses 81 112
Capital formation (accumulation) net 50.4 -23.5 -28
% of final domestic uses 19 -12
Exports 73.7 69.0 -2
Minus: imports 74.5 72.9 -1

(i) Income and Expenditure

The income and expenditure analysis is done on the basis of the national
accounts identity between income on one hand and domestic expenditure (final
consumption, investment) plus exports minus imports on the other. The income
and expenditure aggregates, based on Tables 2 and 3, are presented in Table 7.
In the case of traditional national accounting (column 1 of Table 7) the
income concept is NDP, and the expenditure concepts are final consumption,
net capital formation and exports minus imports. In the case of environmental
acccounting (column 2), NDP is replaced by EDP, consumption by environ-
mentally adjusted consumption and net capital formation by net capital accumula-
tion. Environmentally adjusted consumption is derived from final consumption
by deducting the improvement in the environment which is assumed to be equal
to the government's net (accounting for clean-up of its own pollution) expenditure
for environmental protection (5.0). Environmentally adjusted capital accumula-
tion (-23.5) is arrived at by deducting from net capital formation (50.4) total
environmental uses for all (produced and non-produced) asset categories (73.9).
 The two sets of aggregate data present a very different picture of the economic
situation of the country. Income is reduced drastically between NDP and EDP
from 267.1 to 185.1, which represents a 31 percent reduction. Most of this reduction
is caused by the modifications of the concept of capital formation to obtain a
new concept of capital accumulation. Net capital formation changes from being
positive (50.4) to a negative net capital accumulation of -23.5, which constitutes
a reduction of income of 28 percent. The remaining 3 percent of the total reduction
of G D P are explained by the difference between final consumption and environ-
mentally adjusted consumption (-2 percent) and the decrease of exports minus
imports (-1 percent) (see column 3, Table 7).
According to conventional national accounting, the country's domestic
expenditure presents a healthy picture of capital formation of 19 percent of total
expenditure. Environmental accounting indicates, however, that capital accumu-
lation has been negative. The main factor explaining this result is the inclusion
of non-produced assets into the asset boundary: the depletion of natural assets
reduces the capital formation by a value of 18.2; a further reduction (-55.7, see
Table 3) results from the degradation of land, water and air.

(ii) Income, Output and Capital

Production-related changes in environmental accounting, as compared to
traditional national accounting, are elaborated on in the three sections of Table
8. In Table 8 we use figures for specific industries which are not shown in Tables
2 and 3 above, but which represent disaggregated (by economic sectors) figures
of these tables. Section (i) of the table shows that there is a reduction in value
added for the economy as a whole with EDP amounting to 69 percent of NDP.
The impact differs from sector to sector, however. The largest reductions are in
mining (52 percent) and agriculture (49 percent). In manufacturing, the reduction
is 22 percent. Trade and transport also show a reduction of 14 percent due to
the environmental cost of traffic pollution. All other sectors have lower reductions.
These differences are also reflected in the ratios of value added over output
under NDP and EDP calculations in section (i) of Table 8. For the economy as
a whole, the ratio falls from 52 percent to 36 percent. The largest drop is in
agriculture from 77 percent to 39 percent, followed by mining (44 percent to 21
percent), trade and transport (61 percent to 52 percent), and manufacturing (34
percent to 27 percent). Other sectors show much lower reductions. Consequently,
there are changes in the order of sector contributions to EDP as compared to
NDP. Trade and transport is the largest contributor to both EDP and NDP.
Manufacturing is the second largest and other services the third largest contributor
to NDP. For EDP, however, this order is inverted. The weight of agriculture and
mining in the economy is decreased whereas construction and government services
increase in importance.
The other element of production cost, the use of economic wealth, is also
affected by differences in coverage between traditional national accounting and
environmental accounting. As shown in section (ii) of Table 8, produced assets,
which are the capital element in national accounting, for the economy as a whole
amount to only 38 percent of the total value of capital used, if non-produced
assets are taken into account. For individual sectors the differences in coverage
143
 TABLE 8
ANALYTICALMEASURESI N TRADITIONALA N D ENVIRONMENTAL ACCOUNTING:INCOME,OUTPUTA N D CAPITAL
(in percents)

Industries

Electr., Trade Environ-

Gas and Other Government mental
Analytical Measures Total Agriculture Mining Manufacturing Water Construction Transp. Services Services Adjustm.

EDP as percentage of NDP 69 51 48 78 97 90 86 91 96

Value added as percentage of output,

based on:
NDP 52 77 44 34 36 45 61 62 61
EDP 36 39 21 27 34 41 52 57 59

Value added as percentage of:

NDP 100 12.1 12.6 16.7 0.8 7.1 26.2 14.5 9.9
EDP 100 8.9 8.8 18.7 1.1 9.2 32.5 19.1 13.7 -12

(ii)

Opening balance sheet:

Ratio of produced assets/all assets,
inclusive of non-produced assets 38 43 13 91 92 95 97 34 29
Percentage changes between
opening
and closing balance sheets:
Net capital formation and
volume change due to econ. use
(ecol. valuation)
Produced assets
All assets, incl. non-prod.
assets
Other volume changes in assets,
net
Produced assets
All assets, incl. non-prod.
assets
Revaluation and environ. value
discrepancies
Produced assets
All assets, incl. non-prod.
assets
Total changes, net
Produced assets
All assets, incl. non-prod.
assets

(iii)

Value added-capital ratios, based

on:
NDP 25 20 73 46 35 21 44 49 6
EDP 7 4 5 32 31 18 36 15 2
of economic wealth used in production is even more pronounced: particularly
in the mining sector, produced assets are only 13 percent of the total value of
assets used by economic activities.
Changes in coverage of assets also affect the change over time of economic
wealth between opening and closing balance sheets. In section (ii) of Table 8,
the total changes in assets are broken down into net capital accumulation (includ-
ing ecologically valued volume change of natural assets due to economic use),
other volume changes and valuation discrepancies due to market price changes
and adjustments of ecological assets to market valuation.
The percentage change attributed to net capital accumulation is higher for
produced assets (4 percent) than for all assets (1 percent). For other volume
changes, however, this relationship is inverted. In the case of the traditional
capital concept, other volume changes-due to earthquake damages-cause a
reduction of produced assets (-2 percent), while economic wealth based on the
broader concept roughly remains unchanged (0 percent). This inversion is mainly
the result of the inclusion of new finds of subsoil assets (27.8, see Table 5) in
the latter concept.
Discrepancies in valuation amount to 14 percent for produced assets, reflect-
ing the average annual inflation in the country which was assumed to be 15
percent. In contrast to this, the value of all assets is increased by 20 percent. This
is mainly due to the inclusion of the asset of cultivated land with its high price
increases (331.0 on an opening stock of 1,366.7, see Table 5).
For the individual sectors a basic pattern can be described: total volume
changes, defined as the sum of net capital accumulation and other volume changes,
are approximately the same between the traditional capital concept and the
broader economic wealth concept. There is a marked difference in the case of
agriculture: In this sector, the volume of economic wealth increases by 2 percent
(net capital accumulation of 2 percent plus other volume changes of 0 percent)
when the narrower concept of produced assets is used, while it decreases by 4
percent (net capital accumulation of -4 percent plus volume changes of 0 percent)
when volume changes in all assets are taken into account. The latter reduction
is the result of the negative effects of land erosion, depletion and pollution
(including acid deposition) on natural resources held by agriculture, forestry and
fishing.
The combined changes in value added and economic wealth used in economic
activities have considerable effects on the productivity or rentability of capital.
The different effects on NDP- and EDP-based value added/capital ratios are
presented in the last part (iii) of the table. For the economy as a whole, the ratio
between value added and capital based on national accounting (NDP) is 25
percent; this is reduced to 7 percent if based on environmental accounting (EDP).
For specific sectors, the differences are even larger. In mining, the value
added/capital ratio based on NDP is 73 percent while for EDP it is only 5
percent. For agriculture, the ratio is reduced from 20 percent to 4 percent and
for other services from 49 percent to 15 percent. These are significant changes
in productivity or rentability indicators which might prompt a reassessment of
investment policies as far as capital allocation to economic sectors is concerned.
To the extent that environmental costs are also included in (internal) business
accounts, new EDP-based measures might also affect micro-economic investment
decisions.

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