Augmenting National Income Statistics to Include Environmental Services.

• Author: Muller, Nicholas Z.
• Position: Research Summaries

For nearly a century, the National Income and Product Accounts (NIPAs) have provided policymakers, investors, academics, and the lay public with essential indicators of economic performance. However, since their inception, it has been widely acknowledged, especially among economists, that the NIPAs are an incomplete gauge of output and growth. Critical omissions include the value of home production, leisure time, environmental pollution damage, and natural resources in situ.

Beginning with the seminal work of William Nordhaus and James Tobin in 1973, economists have estimated the magnitude of these gaps. (1) Subsequent research estimating the magnitude of pollution damage in the United States and the global economy finds that they loom large relative to conventionally measured output. (2) Both their magnitude and the central importance of the NIPAs to decision-making broadly suggest that including environmental pollution damage in an augmented accounting system would have far-reaching consequences. The importance of this augmentation lies in four areas: the level of output and its distribution across sectors within the economy, growth, monetary policy, and sustainability. This research summary highlights key issues and research in each of these domains.

By way of background, it is important to recount some of the historical obstacles to empirical estimation of pollution damage as well as remaining challenges to developing an augmented system of accounts. First, at the time of Nordhaus and Tobin's work, emission quantities of common air and water pollutants were just beginning to be measured in a rigorous fashion. In the US, the passage of landmark environmental legislation in the early 1970s meant that regulators were now charged with tracking emissions in order to document compliance. This was a crucial step toward enabling environmental accounting. Second, the effects of pollution on human health, one of the most important sources of damage from pollution exposure, were just beginning to be known. The pioneering work of Lester Lave and Eugene Seskin provided some of the earliest quantitative evidence of pollution's association with mortality risk. (3) Even today, this effect category remains the largest single quantifiable contributor to environmental pollution damage. Third, monetization of nonmarket services such as mortality risk was in its infancy. In 1968, Thomas Schelling developed the idea of valuing tradeoffs between mortality risk and income. (4) This approach, known as the Value of a Statistical Life (VSL), is one of the most important parameters in environmental benefit-cost analysis and environmental accounting. Finally, though in 1973 the social cost of carbon had not been estimated, this parameter is central to estimates of damages from greenhouse gases.

Documenting environmental pollution damage affects the magnitude of aggregate output, net of pollution damage, and the contribution to national product across economic sectors. For example, air pollution damage from the production side of the economy amounted to over 5 percent of gross domestic product (GDP) in 2002. (5)...