part 1, part 2.
In 1921, Wesley Clair Mitchell, Wilford Isbell King and Frederick R. Macaulay published the landmark national accounts study Income in the United States: Its Amount and Distribution, 1909-1919. It´s a high-quality publication, but they mention some drawbacks. One of these:
- The depletion of natural resources is not included as a ´minus´ in their production estimates
The present national accounts, as a rule, also do not do this. Which is still a drawback. How do the new guidelines, one hundred years after Mitchell e.a., treat the depletion of natural resources (paragraphs 7.296-7.298)?
The good news is that the depletion of natural resources is, for the first time, systematically included in the accounts. The bad news is that the wrong prices are used to value depletion.
Up to now, the difference between Gross Domestic Product (GDP, roughly: total production) and Net Domestic Product (NDP) was ´depreciation´ or the decline in value of produced fixed assets.
NDP = [GDP – (total depreciation of produced assets)].
In the new guidelines, this changes into
NDP =[GDP-(total depreciation produced assets + depletion of natural resources)
This makes common sense. When water in an aquifer is used for agricultural production, but the aquifer diminishes or even disappears as a result, that should be considered a cost. The new guidelines stress this. Which is a major improvement (even if somewhat overdue).
A problem is the valuation of the depleted natural resources (for the sake of brevity, I will refrain from the calculation of the economic value of biological natural resources like stocks of fish). You can´t take output prices, as costs are incurred to pump the water, mine the gold, or dredge the sand. The new guidelines, which explicitly link to the UN environmental accounts guidelines (especially section 5.4.3), prefer a system based on the total expected market value of reserves based upon an expected flow of production during an expected number of years, an expected discount rate, expected retail prices and expected production costs and technologies. This is, roughly, the way the balance sheet value of reserves of oil companies is calculated (making additional imputations for risks and uncertainty).
But, as we all know, oil prices are volatile. Additionally, as the development of fracking demonstrates, production technologies are constantly evolving. And at this moment, most new solar, wind, and hydro projects are cheaper than most new oil wells. Something we did not expect ten years ago. Discounting expected future earnings is multiplying uncertainty with uncertainty. Using this method would, because of changing output prices alone, necessitate continuous and large changes to NDP, making this variableit less valuable as an analytical tool and a guide for policy.
Also, why should we even want to use such a seemingly market-based but actually bureaucrat-based system? Superior methods are available.
Let´s take water as an example., It´s a natural resource arguably more important than oil. Sources of water like rivers or aquifers are often as well (!) natural monopolies as, when it comes to provision and distribution, network monopolies. Look here for a recent article showing that, in such a situation, natural resources by their nature do not fit the concept of ´a market´. Let´s take California as an example. To enable agriculture in California´s central valley, water extracted from an aquifer is used. This has its problems:
The invention of the deep-well turbine pump around 1930 allowed withdrawals from greater depths, which encouraged further development of ground-water resources for irrigation. Withdrawals increased sharply during the 1940’s and 1950’s, and … reached a maximum of 15 million acre-feet per year during 1977, a drought year. During the 1960’s and 1970’s, withdrawals greatly exceeded recharge, and water levels declined … as much as 400 feet in places. The declines caused … widespread land subsidence, mainly in the western and southern parts of the San Joaquin Valley.
Increased rainfall and construction of additional surface-water delivery systems halted most of the serious water-level declines after 1977, and water levels recovered to pre-1960 levels … In dry years, however, reliance on ground-water supplies is greater, and aquifers might again be subject to withdrawals in excess of recharge.
(For a comparable situation in the Netherlands relating to the drinking water of over 1,500.000 people look here).
This means that, in this case (all natural resources are different!), we can try to estimate the costs of recharging water, like in this publication. These costs can be used to value depletion. And clearly, environmental damages have to be taken into account, too. But as all natural resources are different we need a plethora of models and methods to calculate the value of depletion. In the case of oil, we can look at the costs of competing kinds of energy like solar and the like to value the reserves of oil companies and to estimate the value of depletion. Mining of gold, with its extreme environmental footprint, will be different again, just like one of the most extensive mining activities of mankind, the dredging of sand. In each case, a specific estimate of short and long-term interests and costs, including environmental costs and costs to local populations, has to be made. The´net present value assuming a mock market´ method advised by the guidelines is one of the worst methods to do this.
Summarizing: including depletion of natural resources into the national accounts is a major improvement. improvement. But valuation is difficult and requires tailor-made solutions. Circumventing this problem by using a market-oriented straitjacket won´t do.
