Natural Resource AccountingNatural Resource Accounting

Session Objectives:

Interpret the results of natural resource accounting

Develop policies based on the results of resource accounting

Session AgendaSession Agenda

What is natural resource accounting

Major accounting methods

Application of natural resource accounting

Discussions

What is Natural Resource What is Natural Resource Accounting?Accounting?

Estimate $ value of resource depletion & environmental degradation as a result of economic activities

Adjust economic indicators (GDP, value-added) to reflect such value

Interpret adjusted economic indicators

Publicize adjusted economic indicators

Suggest policy options

Natural Resource Accounting Natural Resource Accounting StepsSteps

GDP - depreciation of produced capital = NDP

NDP - natural resource depletion = EDP1 EDP1 - environmental degradation = EDP2 EDP2 = environmentally adjusted NDP

User- Cost MethodUser- Cost Method

Split the annual net profits generated through sale of a resource into 2 parts: true income and user cost

True income can all be consumed User cost is estimated in such a

way that if it is invested, the annual revenue from the investment together with any true income from the resource in each year will generate a constant stream of true income annually, indefinitely

R - X = R/(1+r)T+1

R = net profits

X = true income

r = discount rate

T = life time of a exhaustible resource

Net Price MethodNet Price Method

Estimate the total net values of a resource stock at the beginning and end of the year

The difference is the value of environmental loss

Vt = (pt -ct)Q = NtQ

Vt = value of a resource at

the beginning of period t

pt = market value per unit of

the resource

ct = per unit production cost

Nt = net price

Maintenance Cost MethodMaintenance Cost Method

Costs that would have had to be incurred during the accounting period in order to avoid current and future environmental deterioration from the impacts caused during the same period.

Choose avoidance, prevention, or restoration activities based on available knowledge and technologies and according to cost-efficient principle.

Calculate the costs of the chosen activities.

Policy Application 1Policy Application 1 Assess macroeconomic performanceAssess macroeconomic performance

EDP measures genuine net value created by an economy

Given GDP-K1-K2=EDP, for EDP to grow:– No further increase of K1 and K2 while GDP grows;

– Reduction of K1 and K2 even if GDP stays the same;

– Increase of K2 is at least compensated for by reduction of K1; or

– GDP growth must exceed the rate of increase in K1 and K2.

Policy Application 2Policy Application 2 Reform economic policiesReform economic policies

Have resource users pay for user cost or net price and invest the proceeds for ensuring a constant stream of income.

Have users pay for maintenance costs and invest the proceeds for maintaining those functions.

Restructure industrial policies according to relative importance of industries as revealed by sectoral EDPs.

Prevent currency overvaluation and Dutch Disease by correcting the under-pricing of exportable resources

Policy Application 3Policy Application 3Evaluating effects of SD policiesEvaluating effects of SD policies

Environmental impacts over time: (NDP - EDP)/NDP

Living off natural assets: C/NDP vs. C/EDP– C = consumption

Environmental investment: ECF/EDP– ECF = environmentally adjusted net capital formation

Genuine capital productivity: EDP/CAP– CAP = total capital stock

CaveatsCaveats

NRA does not include all economic values of natural resources and environmental functions

NRA does not address the question of environmental irreversibility

The use of NRA must be complemented by environmental and social indicators