Green Accounting

26/12/2021 0 By indiafreenotes

Green accounting is a type of accounting that attempts to include factor environmental costs into the financial results of operations. It has been argued that gross domestic product ignores the environment and therefore policymakers need a revised model that incorporates green accounting. The major purpose of green accounting is to help businesses understand and manage the potential quid pro quo between traditional economics goals and environmental goals. It also increases the important information available for analyzing policy issues, especially when those vital pieces of information are often overlooked. Green accounting is said to only ensure weak sustainability, which should be considered as a step toward ultimately a strong sustainability.

It is a controversial practice however, since depletion may be already factored into accounting for the extraction industries and the accounting for externalities may be arbitrary. It is obvious therefore that a standard practice would need to be established in order for it to gain both credibility and use. Depletion is not the whole of environmental accounting however, with pollution being but one factor of business that is almost never accounted for specifically. Julian Lincoln Simon, a professor of business administration at the University of Maryland and a Senior Fellow at the Cato Institute, argued that use of natural resources results in greater wealth, as evidenced by the falling prices over time of virtually all non-renewable resources.

# System of Environmental Economic Accounting (SEEA)

Objectives of Green Accounting:

  • Segregation and Elaboration of all Environment related Flows and Stocks of Traditional Accounts:

The segregation of all flows and stocks of assets related to environment permits the estimation of the total expenditure for the protection of the environment. A further objective of this segregation is to identify that part of the gross domestic product that reflects the costs necessary to compensate for the negative impacts of economic growth, that is, the defensive expenditures.

  • Linkage of Physical Resource Accounts with Monetary Environmental Accounts:

Physical resource accounts cover the total stock or reserves of natural resources and changes therein, even if those resources are not affected by the economic system. Thus natural resource accounts provide the physical counterpart of the monetary stock and flow accounts of SEEA.

  • Assessment of Environmental Costs and Benefits:

The SEEA expands and complements the SNA with regard to costing:

(a) The use (depletion) of natural resources in production and final demand;

(b) The changes in environmental quality, resulting from pollution and other impacts of production, consumption and natural events, on the one hand, and environmental protection, on the other.

  • Accounting for the Maintenance of Tangible Wealth:

The SEEA extends the concept of capital to cover not only human-made but also natural capital. Capital formation is correspondingly changed into a broader concept of capital accumulation allowing for the use or consumption and discovery of environmental assets.

  • Elaboration and Measurement of Indicators of Environmentally Adjusted Product and Income:

The consideration of the costs of depletion of natural resources and changes in environmental quality permits the calculation of modified macro-economic aggregates, notably an environmentally adjusted net domestic product (EDP).

Problems of Green Accounting:

The SEEA method of calculating Green NDP is beset with a number of problems discussed below:

  1. SEEA does not include comprehensive natural resource accounting because regional natural resource accounts are not reflected in the main accounts of the SEEA.
  2. It focuses on the use of natural resource for economic activities and ignores the flows and transformations within the natural resources.
  3. The types of data needed for SEEA are not available in the necessary format. Thus lack of data has been one of the main problems in the SEEA.
  4. Another problem arises when environmental data are directly connected with data of existing national accounts for the preparation of the SEEA. They require assigning of environmental pollution loads to the appropriate economic activities. However, the costs of preventing pollution can only be determined if the causes of pollution are identifiable. But the causes of many types of environmental pollution are not clear. If there are several pollution factors which cause environmental damage, the assignment of this damage will be highly arbitrary.
  5. Another problem arises when some of the consequences of environmental pollution become visible after a long time. Estimating only the immediate consequences will lead to wrong policy decisions.
  6. Unlike the market prices used by the SNA, there is no simple justifiable valuation system for the SEEA. For different aspects of environmental problems, different valuation problems are used such as prevention and restoration costs and contingent evaluations based on surveys. There are mainly theoretical and arbitrary constructions in SEEA.
  7. The pricing of all environmental variables in monetary terms in the SEEA has consequences:

(i) The accounting system is restricted to those variables which are easily monetized thereby reducing the range of the accounting system,

(ii) Monetization of environmental variables and their concentration of only a few aggregates results in a drastic reduction of the SEEA system.