The World Bank-Italian Trust Fund Project (NO:TF054326)
Submitted to State Environmental Protection Administration, the World Bank
Framework of Green National Accounting System in China
The report is prepared by Statistics School, Renmin Univ., China
Team Leader: GAO Minxue
Team Members: ZHOU Jingbo, XU Jian
Dec, 2006
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Report 1- Framework of Green National Accounting System in China Contents
Contents
1 OBJECTIVES AND PRINCIPLES 1
2 ACCOUNTING BASIS 3
3 BASIC CONCEPTS 5
3.1 Natural Assets 5
3.2 Economic uses of natural assets 6
3.3 Resource depletion value, environmental degradation value, resource management and environmental protection expenditure 6
3.4 EDP: Environmentally - adjusted domestic product 8
3.4.1 Making adjustment by resources depletion 8
3.4.2 Making adjustment by environmental degradation 8
3.4.3 Making adjustment by resource management and environmental protection expenditure 9
4 THE ACCOUNTING FRAMEWORK OF SEEA 10
4.1 The basic elements of SEEA 10
4.2 The basic framework of China’s SEEA 11
4.2.1 A hybrid environmental and economic flows accounting table 11
4.2.2 Flow accounts for resource management and environmental protection activities 13
4.2.3 Stocks and changes of natural assets account 15
4.2.4 Aggregates accounts around EDP 17
5 VALUATION METHODOLOGIES 20
5.1 Basic problems of valuation 20
5.2 Valuation Methods for natural resources 21
5.3 Valuation methods for environmental degradation 21
6 ORGANIZATION AND IMPLEMENTATION 23
6.1 Choosing prior areas, implementing green accounting by theme 23
6.2 Organization structures 23
REFERENCES 25
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Report 1- Framework of Green National Accounting System in China Chapter 1
1 Objectives and principles
System of Green National Accounts or System, also called System of Natural Resource, Environmental and Economic Accounting or System of Integrated Environmental and Economic Accounting (SEEA for short), is a series of theories and methods about how to account the integration of natural resources (natural capital), environment and economy. Based on the System of National Accounts (SNA for short), SEEA incorporates natural resource and environment into economic analysis, and describes the interaction between the environment and the economy, so that it can provide systematic accounting statistics to meet the needs of analysis, decision and appraisement.
With the rapid economic growth during the last two decades, China has become one of the largest economies in the world. Meanwhile, however, China is experiencing severe natural resource constraints and environmental degradation and pollution. In response to these challenges, the Chinese government has adopted a mission of a harmonious (Xiao Kang) society with a view of using practical administrative tools for achieving harmonious, sustainable and scientific-based development.,. It is right the time for China to establish SEEA to provide basic statistics for harmonious and sustainable development strategies and management.
In order to promote the implementation of SEEA in China, provide methodological guidance for regional or specific studies on SEEA, and establish the foundation for the formal Chinese SEEA, we put forth this framework.
SEEA is an ongoing international issue. According to the purpose of SEEA and current accounting groundwork in China, we should follow four principles when constructing and implementing Chinese SEEA.
l First, SNA should be the foundation and the starting point of the SEEA. SEEA won’t supplant SNA, but will reflect the interaction between the environment and the economy by incorporating environmental criteria in SNA, measure the achievement of development by taking environmental cost into account, and eventually provide strong support to integrated natural resource, environmental and economic management.
l Secondly, implementing SEEA should not only follow international experience, but also be adapted to Chinese realities. On one hand, we should keep Chinese SEEA compatible with the international accounting practices by learning from the international experience; on the other hand, we should localize SEEA in China by relying on our own experience and linking up SEEA with our statistical and accounting groundwork.
l Thirdly, we should apply the SEEA at different levels by thoroughly understanding the various functions of SEEA. The interaction between the environment and the economy is multi-dimension and multi-level in nature, and the purpose of SEEA is not only to adjust GDP to derive a “green GDP”, but also to provide comprehensive and detailed statistics for a complete understanding about the relationship between the environment and the economy.
l Fourthly, SEEA should have flexibility to support accounting research on specific environmental issues. At present, the practical application of SEEA, internationally, is still in an experimental stage. It would be therefore prudent for China to experiment with the use of SEEA guidelines as a framework for economy-environment accounting to help focus on the basic pattern, basic concepts, basic tables and basic relationships of accounting which aim to provide a starting point and general platform for environmental accountings on specific themes. Specific accounting research and development of environmental accounts in the case of different regional conditions and different environmental themes are especially encouraged.
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Report 1- Framework of Green National Accounting System in China Chapter 2
2 Accounting basis
The SNA simply provides the structure within which natural capital and environmental services accounts can be organized. The SNA, as it currently stands, does not provide guidance for the collection of natural resource and environmental statistics; SEEA does this but in harmony with the existing SNA structure. As a satellite system of the System of National Accounts, SEEA (The System for integrated Environmental and Economic Accounting by United Nations) brings together economic and environmental information in a common framework to measure the contribution of the environment to the economy and the impact of the economy on the environment. It provides policy-makers with indicators and descriptive statistics to monitor these interactions as well as a database for strategic planning and policy analysis to identify more sustainable paths of development.
The SNA consists of five sub-systems: gross domestic product accounting, input-output accounting, flow of funds accounting, the balance of payments accounting and balance accounting. Among these five sub-systems, gross domestic product accounting, input-output accounting and balance accounting comprise the basis of SEEA, while SEEA include four components: Natural resource asset accounts, Pollutant and material (energy and resource) flow accounts, Environmental protection and resource management expenditure accounts, Environmentally-adjusted macroeconomic aggregates. The input-output table is needed to fully describe the relationship between economic activities and resource depletion and pollutant emissions; the framework of a balanced accounting is needed to fully account for natural assets owned by a country and its significance to sustainable development. The framework of gross domestic product accounts is needed to systemically measure impacts on the environment by economic activities, scientifically measure outputs of economic activities and calculate environmentally adjusted economic products (namely green GDP). China has built a relatively comprehensive system of national accounts through research and practice since 1980s, which provides a solid basis for establishing China’s SEEA.
The SNA is built for a whole economy. China has constructed a relatively comprehensive SNA at two levels: one is at national level; another is at region level of province. Considering the broad territory and obviously different natural conditions and economic development among regions, SEEA should be implemented not only at national level but also at regional level. Hence, the two-level SNA has equipped SEEA with feasibility for regional implementation.
It is necessary to have a solid basis for natural resource and environmental statistics in order to incorporate environmental criteria into the SNA. On one hand, natural resource and environmental statistics can provide physical data about resource and environmental inventories and changes; on the other hand, it can confirm the prices of resource and environmental elements, which enables us to incorporate environmental criteria and values into the SNA. Over the past decades, we have been making great efforts to establish a statistical system of natural resource account for minerals, forests, water, fish and land and have collected basic resource statistics. With more attention on environmental problems in recent years, we have established monitoring and statistical system on environment pollution and protection activities, which covers pollutant discharge and treatment, ecological building and protection. Some of the basic building blocks are in place for the preparation of a comprehensive SEEA for China.
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Report 1- Framework of Green National Accounting System in China Chapter 3
3 Basic Concepts
Incorporating environmental criteria into the traditional SNA, SEEA extends the scope of the SNA, so it’s necessary to introduce or redefine some basic concepts.
3.1 Natural Assets
Natural assets or natural capital have three functions to the economic system: a) resource functions: providing basic materials to the economic system; b) sink functions: absorbing emitted wastes from the economic system, and; c) ecological service functions: providing landscapes and the habitat for all living beings including mankind. Only based on these ecological functions could the economic system exist. In terms of economics and economic accounting, natural elements are called natural assets.
Natural assets can be grouped into three categories according to linkages with the SNA. The first category is cultivated asset, namely all kinds of cultivated plant and animal resources, which are included in economic assets and regarded as cultivated assets. The second category is natural assets that are also included in economic assets but regarded as non-cultivated assets. Natural resources such as land, forest, water, and subsoil mineral are included in this second category. The third category is environmental elements excluded from economic assets, such as Ecological services or ecosystem functions, which are not covered in the former two categories. As a result, on one hand, the concept of natural assets extends the concept of economic assets by taking environmental assets without economic assets’ characteristics into account; on the other hand, it forms an integrated concept of natural assets by reclassifying environmental elements, i.e., those environmental elements scattered in produced or non-produced economic assets are extracted and combined together. Natural assets defined above and the other economic assets (namely man-made assets) are parallel and are useful to describe systematically the interaction between the economy and the environment.
The further classification of natural assets is required in accounting practices. The classification used in practical management does not strictly match conventional statistical classification, but maintains the features of historical evolution and functional management, and focuses on natural resource statistics such as forest resources, land resources, water resources, mineral resources, and so on. In relative literatures of United Nations, natural assets are grouped into three board categories according to functions and existence characteristics: natural resource, land and surface water, and ecosystems. At the same time, natural assets may still be grouped into cultivated assets and non-cultivated assets to be compatible with SNA. All in all, the classification of natural assets needs further studies. Identification of property rights is the difficulty of resource accounting.
3.2 Economic uses of natural assets
The concept of economic uses of natural assets should be defined to measure the contribution that the environment and specifically, natural assets, makes to the economic system.
Economic uses of natural assets can be defined from two different perspectives: a) from the perspective of natural assets, it refers to those natural assets that are inputs to and consumed in the economic process during an accounting period; b) from the perspective of economic processes, it refers to those natural assets inputs consumed in the economic process. In traditional SNA, economic uses of natural assets either are included in “other changes in volume of assets” or aren’t accounted for; in either case, they natural assets are not regarded as inputs in the economic process. To systematically describe the interaction between the economy and the environment and to correct the false accounting in traditional SNA, it is necessary to have an integrated accounting for this term. Hence, a separate accounting item for the changes in volume of natural assets due to economic uses is required to account for the natural assets consumed in the economic process.
3.3 Resource depletion value, environmental degradation value, resource management and environmental protection expenditure
The environmental cost associated with the use of natural assets in economic production is the monetary value of natural assets consumed as inputs to economic activities during an accounting period.
Given the current limits of the SNA in accounting for the relationship between environment and economy, an important goal of implementing SEEA is to estimate and incorporate the monetary values of natural assets consumed in the economic process, measure the environmental cost of economic activities, and adjust the traditional macro-economic aggregates such as GDP for both natural resource depreciation/depletion and environmental costs. Thus, environmental cost and its measurement are important issues in SEEA. Determining these environmental and natural asset values (i.e. depreciation values) in monetary terms has many empirical challenges, particularly since standard valuation methods have not yet been universally accepted even though SEEA does provide valuation examples from international experience. Generally speaking, the adjustment of macro aggregates, like the GDP, can’t be resolved unless there is general acceptance of both the definition and valuation methods for environmental costs and natural asset depreciation.
For different objects and from different perspectives, the concept of environmental costing can take several forms: resource depletion value, environmental degradation value, or resource management and environmental protection expenditures.
Resource depletion (or natural capital depreciation) value is the cost of natural resources used and consumed in the economic process, namely the economic value of deductions of natural resources stocks, emphasizing particularly quantitative uses of natural assets. Resource depletion valuation requires estimates of the economic rent: namely the difference between the market price of natural assets produced for consumption (revenues), the costs of production and a fair return on capital invested (i.e. the opportunity costs of inputs and capital).
Natural resource depletion can be defined as the rent obtained from the non-sustainable exploitation of the resource during an accounting period; it is also the change in economic value of the resource stock from this exploitation. Note that ‘non-sustainable’ excludes natural re-growth and replenishment of the resource, as well as ‘other volume changes’ (OVC) of discovery and natural and political disasters, among others. OVC do not stem from production/extraction and are not ‘cost’ of capital consumption in national accounting terms; they do not affect the income and production accounts, but are recorded in the asset accounts.
Environmental degradation value is the cost of using environmental service functions in the economic process, namely the values of deterioration of environment as a result of their economic uses, emphasizing particularly on qualitative uses of natural assets.