Wednesday, February 01, 2006

The real environmental vandals: accountants

It seems to me that many environmental problems are caused by accountants.

Ross Gittins has a piece in today's Sydney Morning Herald about the running down of our public infrastructure. It's been fairly easy to observe in Australia in recent years what he describes:

WHAT happens when politicians keep promising the electorate new and better government services, but also reinforce the belief that we're already overtaxed - and, for good measure, adopt the attitude that it's a terrible thing for governments to borrow? The short answer is, something's got to give. To make that inconsistent trio of propositions add up, there's got to be something somewhere that's being squeezed. Something that's not terribly noticeable. A path of least resistance.

For some time now, the more alert among us have suspected that the meat in the sandwich may be public works. That the politicians may be making heroes of themselves and proving they can do the impossible by quietly running down the quality and adequacy of public infrastructure.
Well, maybe the more alert among us - or maybe just anyone who's caught a bus or train in the past few years.

Gittins describes how a lot of public infrastructure, particularly at local government level, is being quietly run down to save money. These assets are depreciating at a rate of $1 billion a year but Councils are only setting aside half this amount for their repair and replacement.

The situation is "akin to a family that doesn't make sufficient provision for replacing worn-out parts, let alone saving enough to buy a new car when it reaches the end of its economic life" - which is the point where repairing the car is more expensive than replacing it. And the present backlog of $6 billion to bring assets up to a satisfactory standard is "equivalent to driving a vehicle with serious structural and mechanical problems that have not been attended to".
This raises the question, why?

Because, although in some cases it may be obvious to the public that council assets are run-down or even dangerous, for the most part the problem is hidden.

The issue has been easy to ignore because infrastructure typically has a life of 50 to 60 years and only a small proportion has required renewal so far. Councils have been able to fund the operation and routine maintenance of assets, with a limited amount of renewal. The crunch is still some years off. "By the time infrastructure condition is at such a bad state as to be noticeable to the community, it will long have passed the optimal time for renewal".
It seems to me there's something much bigger than public infrastructure that's being squeezed right now. Something big and not very noticeable and harder than infrastructure to account for.

It's assets that we take for granted because, unlike a sewer or a dam or a road or a railway line, they don't have a monetary value ascribed to them. But they have an enormous value.

These assets are rivers, forests, catchments, oceans, ecosystems. All over the world they're becoming seriously degraded. I think people notice it and think it's a bit of a shame. But what policy makers, governments and business are not really noticing is the huge drain on our wealth that it represents. These ecosystems are not just nice to look at and visit, they provide our resources and absorb our garbage. Eventually they'll get to the stage where we have to spend massive amounts of money repairing and replacing them. If we can do so at all.

But right now, they're just quietly being run down.

This is one reason why environmental economics is important. Putting a dollar value on a forest or river is kind of gross. But putting a dollar value on the economic services they provide is the only way to realise how much wealth we're squandering by running the level of those services down.

Which brings me back to accountants. It's not really their fault of course. But if a company tried to count the profits from selling stuff they manufactured while leaving out the hidden costs of depreciation of the equipment they used to manufacture it, their auditors would jump on them. Companies account for depreciation of their assets.

So where are the environment's auditors? When are we going to start accounting for the environment, for our natural assets?


Phil said...

Where do you start?

But yes, the problem is that our natural resources are seen as having now value save what industry/society can extract from it - it's percieved as free.

Weird when you consider most of these resources are no renewable in any way you would like to interpret that word.

I'm always at a loss as to what to suggest on this topic short of a polemic attack on some aspects of this - and I hate that.

Who are the smart guys that will make this happen? Will we do nothing until we have to?

Too many questions, no real answers save saying that there should be an accounting for the planets gifts to us.

Robert Metcalfe said...

I'm glad that you mentioned accountants and not economists as the environmental vandals!

Maybe accountants now (as opposed to the economic cynics) know the price of everything and the value of nothing.

In terms of environmental accounting, I think the macro analysis is pretty good these days. The World Bank has been one of the forerunners on this issue with their Genuine Savings indicator. There are others out there, but how well they account the environment depends on how much weight you put on natural capital.

In terms of micro accounting, ISO14001 needs to be much more widely adopted, but this will not stop firms being blasé about the environment.