January 19, 2009
Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster
Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.
This week RFF’s Jim Boyd discusses the case for developing a system of national environmental indices, analogous to the national income accounts. Green accounting would help policymakers pinpoint adverse environmental trends where policy intervention may be most urgent. Unfortunately, however, there is much to be done both in terms of developing capacity to monitor environmental trends, and in developing widely accepted methods to weight or value different classes of environmental goods.
Due to the holiday and inauguration this commentary will be featured for two weeks.
Boxcars and Breadlines Are No Way to Measure an Economy: A Plea for Environmental Accounts
by James Boyd
Over the last 80 years, our nation has moved from crude, limited measures of economic activity to an incredibly sophisticated system of national accounts. In the 1930s, if you wanted to know the state of the U.S. economy, you would have had to count box cars traveling between New York and Chicago. Or the number of unemployed you could see in the streets. All we had were impressions of the economy, not measures that allowed for diagnosis, prediction, and cure.
We are at a similar moment today with respect to our natural economy—the environmental goods and services we don’t pay for but that make all other economic activity possible. We know the natural economy is under stress and clearly in decline in some areas.
Unfortunately, we are at the “counting boxcars and breadlines” stage of seeing these changes. Our knowledge of natural systems is impressionistic, not systematic. The lack of well-documented, comparable, time-series data on environmental conditions hinders strategic efforts to address our fundamental environmental problems.
GDP allows us to see the market economy it measures. Green accounts will do the same thing. Without it, we are doomed to surprises, an inability to experiment and learn, and poor public accountability. Accounting systems exist because of a simple human truth: complexity is overwhelming, whether you’re a household, business, or nation. Accounting embraces that complexity but ultimately simplifies it into a clear message.
It is upsetting to note that, by cutting off funds, Congress has for 15 years actively obstructed the development of environmental accounts akin to GDP. Madness? No, just politics. One can imagine certain industries or companies, for example, whose net contribution to society is negative once environmental losses are taken into account. For some, killing the messenger makes good political sense.
GDP: The Problem or the Solution?
Some view our economic accounts, like GDP, as part of the problem. Even to its practitioners, GDP is unsatisfying because of what it leaves out—namely, goods and services that aren’t bought and sold in markets. Household labor isn’t there. Open source software isn’t there. Random acts of kindness aren’t there. And most of nature’s goods and services aren’t there.
At root, all GDP does is track the amount of things we consume, weight those things by the prices we pay for them, and add the result up. When GDP goes up, it means we are producing and consuming more things and more things of higher value. That is a reasonable way to measure things, as long as you’re measuring everything.
But because of what is left out, GDP can easily deceive. GDP always goes up when we use more energy, develop more shopping centers, build more dams, and take more fish out of the sea. We know that can’t be right. Read naively, GDP arguably lulls us into a false, excessively material view of our welfare.
But for all its problems, the idea of GDP is sound. GDP is a triumph of our political and economic system. It is systematic, objective, and politically insulated. There is nothing else like it in. And the evidence that GDP matters is all around us. As it rises and falls, so do political fortunes. Capital markets move on its growth or decline. The press even pays attention.
What we need is an environmental analogue to GDP—a scientific, consistent, apolitical way to measure the health of our natural economy. Integrated accounts will allow us to pinpoint the most important adverse environmental trends and intervene accordingly.
Without objective accounts built on solid data, we will be doomed to squabbling, confusion, and manipulation by the cleverest purveyors of anecdotes and counter-claims. Imagine the quality of our economic policy debates if we first had to argue over the facts of GDP, consumer prices, and the labor market.
How to Do It
It will be a challenge to create a set of national environmental accounts. It will require coordination amongst our federal and state agencies and confrontation with those whose interests are not served by a clearer view of the natural economy. Will it take a lot of money? That depends on your perspective. The 2010 Census—another large data collection effort—is budgeted at $11 billion. If we spent just one tenth of one percent of that sum on environmental accounts, it would be $11 million more than we currently spend (zero).
Once we find the political will to experiment with environmental accounts, the next step is practical measurement of natural goods and services. RFF has an ongoing history of working on this exact measurement problem. If we are to create a Green GDP, what should we count and how should we count it?
An economic account requires two things. First, a clear definition of the goods and services to be counted. In order to avoid double-counting, GDP only counts final goods and services, not all the other inputs used to create them (though indices for inputs are also a part of our national accounts). An environmental index should have the same property: namely, we should only count final environmental goods and services.
What are final, public environmental goods and services? The issue is complex and one that RFF’s research addresses directly. In the simplest terms, final goods are those things and qualities that individuals, households, and businesses directly make choices about. Many environmental goods and services are not final goods but that does not mean they are not valuable. Rather, it means that their value is embodied in the value of the final goods. Consider a salmon population that is commercially or recreationally harvested. The salmon population is a final good. But the food chain on which the salmon depends is not. (Those other species may be final goods for other reasons, such as the existence benefits they provide, but in terms of salmon production they are intermediate, not final goods.)
Other final environmental goods and services include commodities like water supplies, timber, and open space. These commodities should be measured as place- and time-specific amounts, because their value depends on where and when they are available. Air, water, and soil quality are also final environmental goods. We should also measure environmental services like reduced flood, fire, and disease risks because these too are valuable.
In almost all of these cases, goods and services should be measured as place- and time-specific commodities. Satellite monitoring and the growing availability of geospatial measurement will be very important to the measurement of goods and services.
Second, we need weights to attach to those final goods and services so that differences in the value of goods and services are reflected in the index. GDP uses market prices as weights. These are not ideal but are the best practical measure because prices are easily observable. Since the goal of an environmental index is to evaluate the contributions of public goods, we must find a substitute for market prices. This challenge should not be underestimated. Without the market’s invisible hand to tell us the appropriate weights, the weights must be derived some other way. Economists have ways around this—that is, formal statistical derivations of willingness to pay for public goods—but the methods are more technically demanding, time-consuming, and controversial than the use of market prices that are observable to all. Moreover, once we have a goods and services “quantity index,” we can use it to explore the effect different weights have on the overall index. In other words, we can show what kinds of weights lead to a declining versus increasing environmental index.
Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.
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Boyd, James. 2008. “Counting Nonmarket, Ecological Public Goods: The Elements of a Welfare-Significant Ecological Quantity Index,” RFF Discussion Paper 07-42, August.
Boyd, James. 2008. “Don’t Measure, Don’t Manage: GDP and the Missing Economy of Nature” RFF Issue Brief 08-01, May.
Boyd, James. 2007. “The Nonmarket Benefits of Nature: What Should Be Counted in Green GDP?” 61 Ecological Economics.
Nordhaus, William and Edward C. Kokkelenberg, 1999. Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment, National Academy Press.