Green Accounting (GA)

Primary Source: Jeswani, H., and Azapagic, A. (2006) Green Accounting SWOT Analysis in Report on the SWOT analysis of concepts, methods, and models potentially supporting LCA. Eds. Schepelmann, Ritthoff & Santman (Wuppertal Institute for Climate and Energy) & Jeswani and Azapagic (University of Manchester), pp 198-200

Level of analysis: Macro

Assessed aspects of sustainability: Economic

Main purpose of the assessment: To incorporates environmental assets and their source and sink functions into national accounts.

Description of the methodology: Green accounting incorporates environmental assets and their source and sink functions into national and corporate accounts. It is the popular term for environmental and natural resource accounting.

Detailed description

Green accounting is based on the concept that a proper assessment of a country’s income and wealth needs to account for the contributions of activities made by all sectors of the economy and their impact on resource depletion and degradation (UN, 2003). Green accounting addresses the shortcoming of traditional national accounting, known as the System of National Accounts (SNA) by factoring environmental costs into the financial results of operations. It is argued that traditional SNA ignores the value of resources (on and in the ground) as well as the value of environmental degradation (Bartelmus, et al., 2008). Therefore, it gives a false impression of income and wealth and often leads policy-makers to ignore or destroy the environment to further economic development. Incorporating the real value of natural resources as well as their depletion and degradation allows for better allocation of priorities, thereby helping to address the causes of current major environmental problems including the over-exploitation of natural resources such as forests.

It is a controversial practice however, since depletion is already factored into accounting for the extraction industries and the accounting for externalities may be arbitrary. Environmentalists criticise the use of market values for ‘pricing the priceless’ categories of nature. In their view, assessing environmental assets and their services in monetary terms ‘commodifies’ nature, whose intrinsic value should not be subjected to market preferences. They prefer measuring environmental impacts by physical indicators and aggregating material flows through the economy (‘throughput’) in material flow accounts. However, weighting nature by the weight of materials and pollutants assigns doubtful significance (in tonnes) to diverse environmental impacts such as the depletion of a timber tract, emission of a toxic pollutant or the extinction of a cherished species.

Green GDP (or sometimes called Green NDP, or Eco-Domestic Product) is the most popular adjusted macroeconomic aggregate under green accounting framework. It is actually conventional GDP minus all form of capital depreciations (man-made, natural, or human capital). It accounts only for natural capital consumption, ignoring the depreciation of produced (‘fixed’) capital.

Strengths

A particular strength of green accounting is the measurement of environmental cost caused by economic agents of households and enterprises.

Green accounting and accounting analysis can assess the economic and ecological efficiency of different environmental protection measures by governmental and non-governmental organizations.

Green GDP has been associated with sustainable development. It could predict the impact of natural resources depletion on a country’s long-run consumption possibilities by checking whether the trend in Green GDP is upward or downward.

Weaknesses/Limitations

The Green GDP faces the usual problems when addressing environmental damage in monetary terms.

As no internationally recognised standards for calculating ‘Green GDP’ exists, the comparability to other indices is low. The SEEA Handbook (UN 2003) concludes that “there is no consensus on how ‘green GDP’ could be calculated and, in fact, still less consensus on whether it should be attempted at all”.

Opportunities for broadening and deepening LCA

Apart from answering the question whether the economy has performed sustainably during one or more accounting periods, green accounting indicators (green GDP) can be employed in policy formulation and evaluation.

Green GDP calculations can contribute to raise awareness for sustainability concerns among national governments / policy makers, who tend to concentrate on their countries’ fast economic development.

Literature/Internet links

UN (2003), Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003. United Nations. http://millenniumindicators.un.org/unsd/envaccounting/seea2003.pdf

Bartelmus, P., Richmond, A. and Kumar, S. (2008) Green accounting, In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment. http://www.eoearth.org/article/Green_accounting

 

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