Extending national-accounting principles to include pollution

According to Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus

The present study shows that it is possible to develop national accounts that include pollution. Moreover, the source data are sufficient to include pollution accounts for detailed industries. While the present study has developed methods and estimates only for air pollution, we believe that it would be feasible to extend the analysis to water pollution, solid waste, and hazardous waste pollution. Given the size and distribution of damages found in this study, the development by national statistical agencies of a full set of environmental accounts embedded in the national economic accounts is clearly warranted. While private scholars can make provisional estimates of the present kind, a full set of accounts needs the full-time staff, professional expertise, and access to proprietary source data that only a government agency possesses.

They compare the ratio of “gross external damages” (GED) divided by “value added” (VA) and find that

aggregate pollution damages, GED, from the market sector for all industries in 2002 were $184 billion. Summing up GED across two-digit sectors provides a profile of those sectors of the economy that are the heaviest polluters. The two sectors with the highest GED/VA ratio are agriculture (38%) and utilities (34%). They are responsible for $32 billion and $63 billion of damages, or 17% and 34% percent of the total damages produced by market activity, respectively. The sector with the next highest GED/VA ratio is transportation (10%), with air pollution damages of $23 billion. The waste management sector produces GED equivalent to 8% of its VA ($11 billion). Interestingly, while manufacturing is responsible for $26 billion of damages, the GED/VA ratio of manufacturing is low (1%).

The GED/VA ratio varies greatly across industries. For some industries (sewage treatment plants, solid waste combustion, stone quarrying, marinas, and petroleum-fired and coal-fired power generation), GED actually exceeds conventionally measured VA. Crop and livestock production also have high GED/VA ratios, which is surprising given that these activities generally occur in rural (low marginal damage) areas. Other industries with high GED/VA ratios include water transportation, carbon black manufacturing, steam heat and air conditioning supply, and sugarcane mills. It is likely that many of these sources are underregulated.


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