Date: July 15, 1999
Contacts: Vanee Vines, Media Relations Associate
Jennifer Cavendish, Media Relations Assistant
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Environmental Accounting Needed
For More Accurate Picture of U.S. Economy

WASHINGTON -- Congress should authorize the U.S. Department of Commerce to resume development of a national accounting method that links economic activity, natural resources, and the environment, says a new report from a National Research Council panel. The department also should be directed to develop a broad, comprehensive set of economic accounts that includes the contribution of nonmarket services, such as home schooling, and the value of clean water and other environmental assets.

Creating these indicators should be a priority because present estimates of the scope of U.S. economic activity do not factor in the depletion or discovery of natural resources as the economy grows, the panel said. For example, traditional economic indicators regard cutting down a forest for home construction as a plus, but they do not measure the implications of the loss of trees, which could include an increased risk of flooding or soil erosion.

"The fundamental point of environmental and other augmented accounts is to give a more accurate picture of all economic activities of the nation," said panel chair William D. Nordhaus, the A. Whitney Griswold Professor of Economics at Yale University in New Haven, Conn. "We cannot begin to answer many critical questions: For instance, how much have our investments in pollution abatement paid off? We cannot thrive on the market's numbers alone – a full understanding of our economy requires nature's numbers as well."

The concept of environmental accounting is not new. It was introduced in the United States in the 1970s, when concerns about resource scarcity and environmental degradation were heightened by dramatic increases in oil prices and reports on the economic and social costs of pollution.

The Commerce Department began to develop environmental indicators in 1992. Two years later, Congress suspended the work -- often referred to as the "Green GDP" project -- until an external review of the methodology and applications of the approach could be performed. The United States now trails numerous countries in efforts to link economic growth and natural-resource consumption, the panel noted.

Most nations, including the United States, use National Income and Product Accounts to gauge economic performance over time, measure savings and investment rates, and monitor business cycles. But such accounts generally include only a country's economic output from production that is reflected in market-based sales and purchases. Traditional accounts, for example, recognize the market value of electricity generated from oil, but ignore both the depletion of oil reserves and health effects of pollution emitted in the manufacturing process.

The Research Council panel urged Congress to grant the Commerce Department authority to develop and maintain economic accounts for domestic mineral assets such as gold and fossil fuels, and to resume work on accounts for the environment and renewable natural resources such as timber. In addition, Congress should provide funding for the creation of comprehensive nonmarket accounts.

Because research in environmental accounting is in its infancy, however, the panel advised the federal government to record new calculations separately from the market-based data that it currently collects. Doing so would allow researchers to experiment with various methods while preserving the integrity and continuity of traditional accounts that track gross domestic product – the sum of all goods and services produced within U.S. borders -- and other trends.

The nation would benefit in several ways, the report says. Environmental and nonmarket indicators would give policy-makers important information for managing public and private assets to avoid resource shortages. The information also would allow them to make more-informed decisions about regulatory, tax, and spending policies. Businesses could examine environmental account trends to predict shifts in production more accurately. And supplementing traditional accounts with environmental and nonmarket indicators would provide a more complete picture of the nation's economic welfare.

The panel acknowledged the complexity of the job, however. Finding methods to accurately measure the quantity of environmental and nonmarket assets, and assign monetary values to them, are two of the thorniest issues. Reliable data are in short supply, and techniques for assessing public goods, such as clean air, are in the early stages of development. The panel urged the department to base its appraisals on market-based statistics and behavioral data, which provide historical information on consumer-spending patterns, until other approaches have been tested and widely accepted.

The study was sponsored by the U.S. Department of Commerce. A panel roster follows. The National Research Council is the principal operating arm of the National Academy of Sciences and the National Academy of Engineering. It is a private, nonprofit organization that provides advice on science and technology under a congressional charter.

Read the full text of Nature's Numbers: Expanding the National Economic Accounts to Include the Environment for  free on the Web, as well as more than 1,800 other publications from the National Academies. Printed copies are available for purchase from the National Academy Press Web site or at the mailing address in the letterhead; tel. (202) 334-3313 or 1-800-624-6242. Reporters may obtain a pre-publication copy from the Office of News and Public Information at the letterhead address (contacts listed above).

Commission on Behavioral and Social Sciences and Education
Committee on National Statistics

Panel on Integrated Environmental and Economic Accounting

William D. Nordhaus (chair)
A. Whitney Griswold Professor of Economics
Department of Economics
Yale University
New Haven, Conn

Clark S. Binkley
Senior Vice President
Investment Strategy and Research
Hancock Timber Resource Group

Robert Eisner+
William R. Kenan Professor of Economics Emeritus
Department of Economics
Northwestern University
Evanston, Ill.

Dale W. Jorgenson*
Frederick Eaton Abbe Professor of Economics, and
Chair, Department of Economics
Harvard University
Cambridge, Mass.

Brian Newson
National Accounts Directorate

Henry M. Peskin
Edgevale Associates
Nellysford, Va.

John M. Reilly
Associate Director
Joint Program on Science and Policy on Global Change
Massachusetts Institute of Technology

Robert C. Repetto
Tim Wirth Fellow
Graduate School of Public Affairs
University of Colorado

Brian J. Skinner
Professor of Geology and Geophysics
Department of Geology and Geophysics
Yale University
New Haven, Conn.

John E. Tilton
William J. Coulter Professor of Mineral Economics
Division of Economics and Business
Colorado School of Mines

Victoria J. Tschinkel
Senior Consultant for Strategic Environmental Management
Landers and Parsons
Tallahassee, Fla.

Martin L. Weitzman
Ernest E. Monrad Professor of Economics
Department of Economics
Harvard University
Cambridge, Mass.


Edward C. Kokkelenberg
Study Director

*Member, National Academy of Sciences