Green Accounting

Context: Ecologists and environmental economists scorn how superficially countries maintain their financial and national accounts.

• Amounts spent on building human skills, providing education, nutrition, and safeguarding health, land, air, and water quality or forests are classified as consumption expenditure in the national accounts, except for the associated construction and equipment purchased.

What is Green Accounting?

• Green accounting is a type of accounting that attempts to 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 economic goals and environmental goals.

Sustainability checks on the output generated:

• National accounts measure output by assessing income generation.
• Environmental economic accounts measure output as the change in natural capital (as distinct from physical capital- buildings, roads, machinery- all of which degrade natural capital).
• The flaw in the national accounts’ approach of focusing on the output generated from capital is that it does not have a “sustainability” check.
• Environmental economists instead deduct the value of natural capital degraded in the process of generating income from the annual output, to assess whether economic growth is negative or positive.
• Negative growth is unsustainable because it borrows from the future to enjoy income today—a Ponzi scheme that cannot be played endlessly—akin to a country accumulating debt without building the capacity to repay it.

The flawed logic of substitutability and an infinite supply of natural resources:

• The logic of not accounting for the stock of natural resources in the United Nations Statistical Commissions’ (UNSC) approved system of national accounts, followed worldwide, is simply that natural resources were, till very recently, presumed to be inexhaustible and in specific cases even substitutable.
• For instance, Wood can be replaced by limestone-based cement and iron for building houses. Coal is replaceable with petroleum oil, natural gas, biofuels, or newer forms of renewable energy for our energy services.
• Ecologists and environmental economists reject the assumption of infinite substitutability of natural resources as based on less than adequate knowledge of how nature works.
• They view the stock of natural resources as the outcome of innumerable complementary processes between specific resources, linking them together organically.
• Extracting a part of the whole, could disturb the equilibrium and send a stable ecosystem over the “tipping point”—a phrase the world is now familiar with since the impact of cumulative carbon emissions on global warming and climate has become the subject of close scientific scrutiny.

System of Environmental-Economic Accounts (SEEA):

• Recognising the need to make economic accounting environment-sensitive, the UNSC formulated the System of Environmental-Economic Accounts (SEEA) in 2012.
• The SEEA (central framework) applies the accounting concepts, structures, rules, and principles of the System of National Accounts (SNA) to environmental information.
• It allows for the integration of environmental information (often measured in physical terms) with economic information (often measured in monetary terms) in a single framework.
• India – A graduated approach to green accounting:
• In India, the Central Statistical Organisation (CSO) leads in embedding environmental economic valuations into natural capital stocks and services.
• Following the 1992 Earth Summit, CSO produced a Framework for the Development of Environmental Statistics (FDES).
• A Compendium of Environmental Statistics was released in 1997 and updated periodically.
• The Ministry of Statistics and Plan Implementation commissioned a set of studies between 2000 to 2006 assessing and valuing land, forests, air, water, and subsoil resources.
• An expert group chaired by Dr. Patho Dasgupta released a report “Green National Accounts in India” in 2013, which proposed a framework, aligned with the SEEA framework.
• The CSO released physical accounts for four resources—land, water, minor minerals, and forests in 2018.
• EnviStats India 2019 added a quality index for two resources—soil and water and valued two services—cropland ecosystem services and natural resource-based tourism services.
• The task of making government financial accounting systems compatible with environmental economic accounting is being led by the Government Accounting Standards Advisory Board (GASAB) under the Comptroller and Auditor General, which published a Concept Paper on “Natural Resource Accounting in India” in June 2020.
• There has been significant activity, since the 1990s, around natural resource accounting. However, India is nowhere near integrating environmental accounts into national accounts.

Way Forward: Miles to go

• A 2020 UNSC global survey of implementation of environmental-economic accounting found that 89 countries had compiled at least one account in the last five years—up from just 54 in 2014—whilst 62 countries are doing so regularly.
• One way of checking governments’ commitment to a program is to assess the resources being made available for it.
• In 2020, on average, governments had allocated only 3.7 full-time staff for environmental-economic accounting.
• Developed countries had allocated, on average, five full-time staff, illustrating marginal but consistent commitment to green accounting.
• Nevertheless, environmental economic accounting at the ecosystem level (SEEA EA) is already crucial for sector decision-making – best illustrated by the case of carbon emissions.
• Achieving the 2030 global target of reducing carbon emissions to 45 percent below the 2010 level is one way to make governol. After all, only that which gets measured gets done. The private sector, and citizens believe that environmental economic accounting is a useful tool. After all, only that which gets measured gets done.

Source:  Observer Research Foundation

Previous Year Questions

Q.1) “Climate Action Tracker” which monitors the emission reduction pledges of different countries is a:(2022)

1. Database created by coalition of research organisations
2. Wing of “International Panel of Climate Change”
3. Committee under “United Nations Framework Convention on Climate Change”
4. Agency promoted and financed by United Nations Environment Programme and World Bank

Q.2) Consider the following statements:

1. The Climate Group is an international non-profit organisation that drives climate action by building large networks and runs them.
2. The International Energy Agency in partnership with the Climate Group launched a global initiative “EP100”.
3. EP100 brings together leading companies committed to driving innovation in energy efficiency and increasing competitiveness while delivering on emission reduction goals.
4. Some Indian companies are members of EP100.
5. The International Energy Agency is the Secretariat to the “Under2 Coalition”.

Which of the statements given above are correct?  (2022)

1. 1,2, 4 and 5
2. 1,3 and 4 only
3. 2,3 and 5 only
4. 1,2, 3, 4 and 5