A healthy environment — priceless

The idea of melding economic and environmental goals is not new, but acceptance is growing for the idea that a healthy environment is part of a healthy economy. "Green accounting" refers to the application of the principles of environmental economics, which ascribe tangible economic value to natural resources. These principles can be applied to valuing marketable natural resources like trees and oil deposits as well as more intangible factors like air quality, and even not-so-green issues like the valuation of a person's leisure time.

India, the world's second most populous country, is on a tear. Economic growth rates for the past decade have been among the highest in the world. But, breakneck economic growth has a price: The Ganges River is too polluted to swim in, and the smog in India's largest city, Mumbai (formerly Bombay), is thick as soup.

This trade-off is often accepted as standard operating procedure; rather than worry about the environment, the world's developing countries first worry about feeding and clothing their populace. With the achievement of stability and an elevated standard of living, however, a country may decide it is time to start thinking about cleaning up the mess that industrialization wrought.

Rajiv Sinha, a marketing professor at the W. P. Carey School of Business, believes that economic growth and a healthy environment do not have to be mutually exclusive. Sinha, a native of India, and two colleagues from Deutsche Bank founded the Green Indian States Trust (GIST) in 2004 to further the idea of "green accounting" across India.

The greening of accounting

"Green accounting" refers to the application of the principles of environmental economics, which ascribe tangible economic value to natural resources. W. P. Carey economics Professor Kerry Smith says the term encompasses a broad and diversified set of principles within the discipline of economics.

These principles can be applied to valuing marketable natural resources like trees and oil deposits as well as more intangible factors like air quality, and even not-so-green issues like the valuation of a person's leisure time. The system of national accounts utilized by most countries typically does not include ways to measure the natural resources that are being used up, or the environmental services that might be degraded by economic activities.

Instead, national accounts are based on marketed goods, allowing us to define GDP, which simultaneously measures the total output of goods and services and the income generated in the process of producing them, writes Smith. GDP (and its related big-picture metrics) is used as a scorecard to judge the health of an economy.

But Smith, who has devoted much of his professional work to the topic, says that without measuring environmental factors, GDP does not provide a complete picture of the well-being created for people in an economy. In a paper coauthored by H. Spencer Banzhaf, an economist at Georgia State University, Smith notes that, "Clean lakes and fishing tackle are both required for angling; clean air and medicines both can prevent asthma attacks; but only the latter element in each pair is counted in GDP."

The paper further notes that, "If the pump at an oil well wears out, its depreciation is deducted from GDP; if the oil runs out, it is not ... By the same token, discoveries of new natural resources are also not added to GDP." Smith would like to see national indicators like GDP expanded to reflect an environmental component — as would Sinha. Such a shift in practice and philosophy would signal to policymakers and to the public that natural resources have tangible value.

While we buy cars and pens and hamburgers and thus are able to infer by these market transactions how much people value these products, we do not have the same kinds of information to learn the tradeoffs people would make for clean air. We do not explicitly pay for clean air or the habitat provided by an old growth forest, so it is easy to think of them as free goods.

How to value the priceless?

There are, however, significant hurdles to overcome if national accounts are to be adjusted for so-called green factors. It is hard to put a value on what we see as either priceless or worthless, Smith says. How much is a tree worth, after all? Currently we place a value on the environment, but it isn't a hard and fast number. For example, everyone values clean air, but someone with asthma would put a higher value on it.

Smith concedes that resolving all of the issues involved in establishing a national economic indicator that incorporates green factors is a monumental task — but not impossible. In the years before World War II, economists first formulated a comprehensive system to measure GDP and other aggregate measures of activity resulting from production of marketed goods and services — solving a complex problem using pencils and paper-based records. And, public interest is growing.

For decades, environment legislation was "command and control" — i.e. limits were placed on the quantity of pollutants that could be released into the environment. The passage of the landmark Clean Air Act in 1990 inaugurated a more creative approach, enabling companies that reduce pollution to reap financial benefits. Since the passage of the Clean Air Act, however, there has been little progress towards incorporating green accounting.

For example, the U.S. Bureau of Economic Analysis had begun to measure the depletion of stocks of natural resources in the early 1990s, but was subsequently prohibited from doing so by the U.S. Congress. Smith proposes a baby-step approach to reforming an entrenched system. Pick the low-hanging fruit first, he suggests. Valuing resources like trees or oil reserves would be relatively easy because the market already sets prices for these things.

We know how much a piece of lumber or a barrel of oil costs. The next step would be to tackle more intangible factors like clean air. Smith proposes a set of "satellite accounts" — statistics that would try out different ways of measuring these difficult concepts. These "test concepts" would serve as indicators and promote discussion, ultimately leading to a workable formula.

The GIST of things in India

Rajiv Sinha, who visits his birth country regularly, says India has no time to spare. The country's environmental conditions worsen every day. On balance a poor country, India's per capita income is $3,300. Sinha knows that it is hard to tell a poor farmer not to cut down trees if they serve as his only source of fuel or building materials. However, through GIST, Sinha and his colleagues hope to change perceptions about the interrelationship between economic success (and standard of living) and environmental health.

"That's our hope — that we can get in right now and truly effect change while there's still time," he says. The foundation has offices in India and supports the collection of research and the dissemination of its findings with the goal of introducing green accounting to the subcontinent. GIST was not modeled on any other green accounting organization and Sinha does not know of another like it India, although he has heard of similar organizations elsewhere in the world.

It helps that India's Prime Minister, Manmohan Singh, is an economist and that GIST's founders have the ear of India's influential national planning commission. Sinha also believes that there is an opportunity to instill GIST's ideas early in India's economic development process, before standards and practices are too solidified. In short, the organization is focused on the creation of economic scorecards that factor in environmental losses and gains for every state in India.

For example, in the state of Maharashtra (home to Mumbai), the state's Gross Domestic Product in 2002-2003 was $63.8 billion but the depletion and degradation of agricultural and pasture land alone costs the economy some $693 million. Sinha hopes that GIST's work will resonate with the country's educated middle class and at least filter down to the farmers and laborers so they know that deforestation can hurt them in the form of poor soil and floods.

In the end, the objective is to avoid sacrificing the environment for commercial growth when an unhealthy environment can ultimately negatively affect an economy. Smith says it's a lesson that applies not only to India, China and the rest of the world's developing countries but to the developed countries too. "We're running out of time," says Sinha.

Bottom Line

• The idea of melding economic and environmental goals is not new, but acceptance is growing for the idea that a healthy environment is part of a healthy economy. The Clean Air Act of 1990 popularized the idea of economic incentives for environmental protection.
• Green accounting seeks to link economic performance (as measured by metrics like GDP) to environmental health, but establishing values for resources like trees and clean water in monetary terms is difficult.
• Advocates of green accounting argue that developing countries can further their economic successes — at least in the long-run — by being mindful of how they use their natural resources before costly problems develop.
• GIST, an Indian organization furthering the ideas behind green accounting, is already making headway in the developing country and may serve as a model to other countries.