Green Accounting

Green accounting is a type of accounting that attempts to factor environmental costs into the financial results of operation. It has been argued that gross domestic product ignores the environment, and therefore policymakers need a revised model that incorporates ‘green accounting’.

Green accounting is a new system of sustainable accounting. It permits the computation of income for a nation by taking into account the economic damage and depletion in the natural resource base of an economy. It is a measure of sustainable income level that can be secured without decreasing the stock of natural assets. This requires adjustment of the System of National Accounts (SNA) in terms of stock of natural assets. In the System of National Accounts (SNA), allowance is made for capital consumption or man-made capital while calculating Net Domestic Product (NDP). We know that, NDP = GDP - Depreciation.

SNA has the following defects:

i. It neglects the depletion of natural capital such as farmland, forests, fishing stocks, minerals, etc.

ii. It neglects environmental degradation mainly from pollution.

iii. It neglects defensive expenditure which the society incurs in facing external effects of environmental degradation.

To overcome these drawbacks of SNA, the Statistical Division of UN has developed the System of Environmental-Economic Accounting (SEEA). The SEEA focuses on:

i. Accounting for the depletion of scarce natural resources and

ii. Measuring the costs of environmental degradation and its prevention.

Thus, the computation of Green NDP or Environmental Domestic Product (EDP) includes the measure of national product which includes the economic cost of degrading natural resources which are required to produce goods and services directly and indirectly.

SNA defines Net Domestic Product as:

NDP=Net Exports (X - M) + Final Consumption (C) + Net Capital Accumulation (I)

To arrive at Green NDP or EDP, Net capital accumulation (I) is replaced by the net capital accumulation of produced and non-produced economic assets minus net capital accumulation of non-produced natural assets. Thus, the identity becomes

EDP/Green NDP = (X - M) + C +  NAp.ec  + (NAnp.ec - NAnp.n)

Where,

EDP = Environmental Domestic Product

(X - M) = Exports minus Imports

C = Consumption

NAp.ec = net capital accumulation of produced economic assets.

NAnp.ec = net capital accumulation of non-produced economic assets.

NAnp.n = net capital accumulation of non-produced natural assets.

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