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Herman Daly's Advice for Fostering Environmentally Sustainable Development
Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. Thus sustainability is built into the very definition of income. But the productive capacity that must be maintained intact has traditionally been thought of as manmade capital only, excluding natural capital. We have habitually counted natural capital as a free good. This might have been justified in yesterday's empty world, but in today's full world it is anti-economic. The error of implicitly counting natural capital consumption as income is customary in three areas: (1) the System of National Accounts; (2) evaluation of projects that deplete natural capital; and (3) international balance of payments accounting.
The first (SNA) is well recognized and efforts are underway to correct it-indeed, the world Bank played a pioneering role in this important initiative, and I hope will continue to contribute to "greening the GNP".
The second (project evaluation) is well recognized by standard economics which has long taught the need to count "user cost" (depletion charges) as part of the opportunity cost of projects that deplete natural capital. Bank best practice counts user costs, but average Bank practice ignores it. Uncounted user costs show up in inflated net benefits and an overstated rate of return for depleting projects. This biases investment allocation toward projects that deplete natural capital, and away from more sustainable projects.
Correcting this bias is the logical first step toward a policy of sustainable development. User cost must be counted not only for depletion of non-renewables, but also for projects that divest renewable natural capital by exploiting it beyond sustainable yield. The sink or absorptive services of natural capital, as well as its source or regenerative services, can also be depleted if used beyond sustainable capacity. Therefore a user cost must be charged to projects that deplete sink capacity, such as the atmosphere's ability to absorb CO2, or the capacity of a river to carry off wastes. It is admittedly difficult to measure user cost, but attempting to avoid the issue simply means that we assign to depleted natural capital the precise default value of zero, which is frequently not the best estimate. Even when zero is the best estimate it should be arrived at not by default, but by reasoned calculation based on explicit assumptions about backstop technologies, discount rates, and reserve lifetimes.
Third, in balance of payments accounting the export of depleted natural capital, whether petroleum or timber cut beyond sustainable yield, is entered in the current account, and thus treated entirely as income. This is an accounting error. Some portion of those nonsustainable exports should be treated as the sale of a capital asset, and entered on capital account. If this were properly done, some countries would see their apparent balance of trade surplus converted into a true deficit, one that is being financed by drawdown and transfer abroad of their stock of natural capital. Reclassifying transactions in a way that converts a country's balance of trade from a surplus to a deficit would trigger a whole different set of IMF recommendations and actions. This reform of balance of payments accounting should be the initial focus of the IMF's new interest in environmentally sustainable development. The World Bank should warmly encourage its sister institution to get busy on this-it does not come naturally to them.
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