Write a short note on Green Accounting. what are the problems of Green Accounting? Is it superior to conventional accounting?

A note on Green Accounting:

Prof. Mahendra Kumar Ghadoliya

Meaning:

“Green accounting is a type of accounting that attempts to factor environmentalcosts 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.”Wikipedia, (https://en.wikipedia.org)

Why Green Accounting:

Measures of the economic activity in the system of National Income Accounting can be misleading because of the following:

(a)   Environmental quality is not reflected in the conventional data.

(b)  Depletion of natural resources is not considered.

(c)   Earlier economists believed that natural resources were gift of nature. This was wrong in fact their quality has an impact on the quality of life.

(d)  The expenditure made on maintenance of the environmental hazards is mistakenly considered as investment in the System of National Income Accounting (SNA)

We have already studied the concept of national income where we have defined the Net Domestic product as;

NDP= C+I+G+(X-M)

To arrive at Green NDP the concept of net capital formation (I) is replaced to include non-produced capital assets and account for its depletion by subtracting the used non- produced assets from the initial stock.

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

Where;

Green NDP = Environmentally adjusted domestic product.

С = Final Consumption

NAp.ec = Net accumulation of produced economic assets.

NAnp.ec = Net accumulation of non-produced economic assets

NAnp.n = Net accumulation of non-produced natural 

Net Export(X-M) = Exports-imports

Problems of Green Accounting:

The SEEA method of calculating Green NDP hasseveral problems discussed below:

1.  comprehensive natural resource accounting is difficult to introduce.

2.   Regional natural resource accounts are not reflected in the main accounts.

3.  The stock of natural resources cannot be estimated in advance. New discoveries always changes the availability

4. It focuses on the use of natural resource for economic activities and ignores the flows and transformations within the natural resources.

5. Lack of Data and methodology: 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.

6. Causes of environmental degradation not known:  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.

7. Visible after a long time: Some problems are visible after very long time. Estimating only the immediate consequences will lead to wrong policy decisions.

8. 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.

9. 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.

It’s Superiority over Conventional Accounting System:

Conventional national income accounting does not fully consider pollution preventive expenditure. Green accounting considers pollution preventive expenditure and environment impact studies.

Conventional national income accounting does not measure the depletion of natural resources and the degradation of the environment. Green accounting considers the costs of depletion of natural resources and changes in environmental quality.

Conventional national income accounting does not fully report different types of resource expenditure:

(i) Consumption of environmental goods such as exhaustible resources; and

(ii) Conflicting uses of environmental services such as the atmosphere used by producers as an input into production and by household as a consumption good.

On the other hand, green accounting expands and complements the conventional system of national accounts about costing:

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

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

Incorporating more information on natural resources and environment into the accounts requires much conceptual framework and data gathering. The most challenging problems are: 

Determining the most appropriate way of measuring physical changes in environmental quality and natural resource reserves.

Developing reliable and consistent methods of these assets accounting. The united Nations efforts concentrated on determining monetary value of depletion of non-renewable resources and identifying abatement expenditure designed to reduce pollution damages. These efforts are not enough; substituting market value for non-market services generates controversy. Nevertheless, it may be feasible to expand the information on natural resources and environment beyond that provided by the market, especially for imputing the value of factor services such as environmental waste disposable and certain final services. There is a long way to go on the methodology of green accounting. The beginning has been made and the continuous refinement will make these data more useful and reliable than the data for conventional national income accounting.

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