An ‘environmental accounting’ primer

What is it? (and why should we use it?)

By Peter Burnett

‘Environmental accounting’ (or ‘environmental-economic accounting’ to use its full name) is, on first blush, a dry-as-dust topic. Yet the ideas behind it and the insights it unlocks are fundamental to good environmental governance and a meaningful shift towards sustainability. That’s in part why Australia’s governments adopted a national strategy, or at least a common national approach, to environmental accounting in 2018.

Recently I attended a workshop in Brisbane on environmental accounting* hosted by state and federal governments. The workshop was lively and well-attended, with many more participants asking to be part of the discussions than had been originally invited. Clearly the value of environmental accounting is beginning to be acknowledged across multiple sectors.

But the development of environmental accounting didn’t happen overnight. Its gestation took over half a century with some of its central concepts going back centuries. What’s more, a lot more needs to happen before its full potential is realised.


Environmental accounting can be traced back to the 1970s when several countries, including Norway and France, developed what was then described as ‘natural resource accounting’, or in the case of France, ‘patrimonial accounting’, as part of their response to the emergent major environmental concerns of that era. There were also fears associated with resource scarcity arising from the oil crisis of 1973. These accounts were kept in physical terms.

At about the same time, economists William Nordhaus and James Tobin (later to be Nobel laureates) wrote a seminal paper highlighting the shortcomings of GDP as an economic indicator. They argued for a ‘Measure of Economic Welfare’ (MEW) that subtracted consumption of capital, including ‘environmental capital’, from domestic product. This is because treating consumed capital as income creates an inflated sense of well-being in the short term but is unsustainable over the longer term. Implementing a MEW would require the inclusion in national accounts of figures for the consumption of environmental or ‘natural’ capital, expressed in monetary terms.

During the 1980s the United Nations Environment Program (UNEP) and the World Bank ran workshops aimed at linking environmental accounting to the System of National Accounts (SNA), an international standard maintained by the UN. This work may have influenced another well-known UN project, the Brundtland Report of 1987, famous for proposing a global goal of ‘sustainable development’.

Brundtland placed great emphasis on policy integration as essential to achieving sustainable development. Although Brundtland did not go on to recommend environmental accounting per se, it did couch some of its arguments in economic and accounting terms, referring for example to ‘overdrawn environmental resource accounts’ and the need to maintain the stock of ‘ecological capital’. Given the implicit connections made in Brundtland, it’s probably no coincidence that Agenda 21, the action plan adopted by the subsequent Rio Earth Summit of 1992, linked accounting and sustainability directly by including a commitment to develop integrated environmental and economic accounting as ‘a first step towards the integration of sustainability into economic management’.

With Agenda 21 providing a mandate, the UN soon published a handbook on integrated environmental and economic accounting in 1993. However, it took a further 20 years to develop the handbook into a full international accounting standard and even then the scope of the standard was confined to traditional natural resources, with ecosystem accounting relegated to a supporting ‘experimental’ framework. The UN is scheduled to consider adopting a revised version of this experimental framework as a full international accounting standard in 2021. I hope this indeed occurs, but it reflects how long these processes take. The gestation period for this work is nearly 30 years!

Delay aside, a key innovation of the resulting System of Environmental-Economic Accounts (SEEA) is the concept of ‘combined presentation’, the ability to produce accounts expressed in either physical or monetary terms, or both. This allows accounts to support two streams of work: 1. the integration of environmental consumption into national accounting and
2. the use of physical accounts to inform environmental management.

Why bother?

As national accounting informs economic decision-making, the rationale for environmental accounting in monetary terms is clear. But why bother with physical accounting, other than as an intermediate step to monetary accounts? The answer lies in two developments, one in the late 1960s and the other going back to medieval times.

Concerns about the extent of environmental decline had been growing steadily through the 1960s. In 1969** two resource economists, Robert Ayers and Allen Kneese made a profound observation concerning environmental ‘externalities’ (externalities are the costs or benefits affecting persons not party to an economic transaction). Their observation was that if environmental externalities could no longer be regarded as exceptions, but were more the norm, then good economic decision-making required a ‘materials balance’; that is, a full recording and accounting for environmental impacts, in physical terms. Implicitly, Ayers and Kneese had just made the case for environmental accounts.

The other development foundational to the case for environmental accounting is the concept of the ‘double entry’, which goes back at least to the medieval ‘Venetian method’ of book-keeping. Double entry recognises that almost all transactions involve both a gain and a loss. In purchasing equipment for example, a business gains the equipment but loses the money used to pay for it, so it records both the gain and the loss in separate ledgers, one for equipment and one for cash. Moreover, accounting links the two aspects of the transaction, showing that this purchase in the equipment ledger was paid for with this payment, and correspondingly that this payment was attributable to that equipment purchase.

Stocks and flows

Environmental accounting builds on the parallels between our interactions with each other in business and our interactions with the environment. Just as business accounting tracks the stocks of business assets and liabilities, and the flows of business receipts and expenditure, recording the net change in capital at year’s end, so environmental accounting tracks the stocks of environmental assets (and liabilities, eg pollutants) and the flows of ecosystem services (and expenditure on ecosystem maintenance), recording the net change in natural capital each year.

Moreover, environmental accounts record the transaction from both society’s end and the environment’s end, making it ‘quadruple entry’. As a result, environmental accounts can show for example that this flow of ecosystem services to society came from that environmental asset, depleting it by this much, but that the depletion was offset by that degree of natural replenishment and this much environmental maintenance. This capacity to link transactions so specifically to their causes and impacts is what makes accounting a powerful tool for environmental analysis and decision-making.

What next?

Environmental accounting is starting to build significant momentum in Australia. As this work is still in its infancy, despite its long gestation, the ongoing work under way nationally and internationally to develop accounting standards and protocols remains important. More important however is the need to pay extra attention to, pardon the pun, the other side of the ledger, the application of accounts for better decision-making. I will cover this in a future article.

* The Brisbane workshop on environmental accounting brought together a number of researchers to present their work on the development or application of accounts. For example, Victoria presented their work on using accounts to identify the ecosystem services provided by forests.

**1969 is big in the news at the moment with the 50th anniversary of the Moon landing. It seems strange to me that so much attention is paid to this triumph of technology; while so little attention has been given to 1969 as the dawn of modern environmental policy. Beyond the analytical insights of Robert Ayers and Allen Kneese, 1969 also marked the passage of the world’s first comprehensive environmental law the US National Environmental Policy Act (NEPA), thanks significantly to the efforts of Professor Lynton Caldwell.

Image by Free-Photos from Pixabay

5 thoughts on “An ‘environmental accounting’ primer

  1. Hello I am first year college student that is interested in becoming an environmental accountant.
    I would like to interview someone that works in that field.
    Could you provide me a list of people that I could contact in order to get more exposure in the field?
    Thank you for your time and take care.


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