George M. Mangion | Wednesday, 21 January 2009

Who is counting for Climate Change?

A lot of attention has been given to a Climate Change report issued recently for consultation. The report mentions inter alia that the local public mood has shifted from one of neglect towards our duty to care about the sustainability of our environment.
There is a growing public demand to account for the damage done to the climate and pointing squarely at the political will towards the responsibility for improving emissions. As EU members we share the responsibility to reduce overall emissions to 20 per cent below 1990 levels, with the possibility that in the event of an International Agreement on CO2 emissions reduction, the reduction requested of the EU Member States will be of 30 per cent. Can we do this by following the 87 recommendations in the report?
Recommendation 77, with which I wholly agree, suggests that the Government should, establish Gozo as the Eco-Island, consider introducing Electric or LPG powered buses in Gozo by not later than 2016. All this is very welcome but where are the millions coming to match our wishes?
Again, is anybody counting the cost?
Perhaps this follows hot on the heels of criticism over excessive air pollution of late. Hence the controversy of testing buses and heavy vehicles for their exhaust emissions and the use of a legal fuel mix. Equally, arguments have been pronounced and theories discussed by our politicians on the need to properly account for the cost of sustainable environmental well-being. In the past, the public was lethargic to its duty to be proactive and one hopes that the document on climate change will attract its deserved attention. In larger European states one reads about the setting up of a national regime to cater for green or sustainable accounting which incorporate environmental assets and their sources. Gradually we are becoming aware of the need to start measuring environmental and natural resource accounting. As a general rule, one finds that conventional national accounts largely ignore the costs of say pollution and other damage to the ecology. This does not mean that local pressure groups do not raise their voices when they are aware of infringements to the sustainability of the environment - particularly when these measures threaten to undermine the sustainability of economic performance and growth. What is so vividly missing is the difficult part of costing the environmental degradation as an ‘external’ (social) cost of economic activity. This accounting concept hones on capital maintenance, as applied to the biosphere, in recognising the need to maintain the stock of natural capital for future generations. Typically one expects that sustainable cost is deducted from the accounting profit of polluting agents to arrive at a notional level of a sustainable score sheet. In rare cases where the sustainable cost exceeds the accounting gain the degree of unsustainability is conveniently measured in monetary terms. To quote a vivid example, recommendation 44 in the recent climate change document suggests that the Government should initiate measures to introduce autogas as an accessible and affordable substitute for fuel for vehicle drivers, with autogas to be available for distribution by not later than 2010. Can anybody cost the health risks arising to the community from excessive exposure to heavy vehicle emissions and measure these as a separate cost matched with the advantages of cleaner air? Does this feature in our national budgets? Not really.
Again, when farmers spray crops with pesticides (parts of which occasionally permeate the water table), the farming community boosts the GDP in terms of produce, but no deduction is made for the health costs associated with the water pollution. Further examples abound but on an international scale, one reads figures published by the World Bank on expensing the degradation effect resulting from excessive depletion of natural resources such as oil, natural gas, minerals. This is not to mention the deleterious effect on the atmosphere of pervasive doses of carbon dioxide acting as a deadly pollutant. Moreover, countries that have experienced higher population growth have also lost wealth per capita by neglecting the environment at a faster rate. So the solution is that we should seriously start considering going green on accounting on a global scale. As stated above, the age-old measure of GNP in our national accounting only measures economic activity in terms of the amount of final demand satisfied by economic output. The use of this figure as a distorted measure of wellbeing rests on the false premise that wellbeing is proportionate to consumption of produced goods. However, as in the case of the transport industry saving on fuel cost by allegedly mixing fuel with cheaper illegal fluids, the resultant cost of health remedies for asthma and respiratory deceases is obscured. In a tightly populated island, we witness some of the damage caused by pollution and this is invariably reflected in reduced output, as in the case of diminished agricultural output due to polluted soils and untreated water extraction from illegal bore holes. As can be expected, environmental damage from dirty beaches, air/noise pollution and uncollected rubbish in villages directly affects human welfare. Yet, our national accounts mask this loss. Children bathing in areas where the air is polluted by heavy emissions of speedboats and other pleasure crafts are often more susceptible to viruses and coughing which may resurface when schools reopen. So does the choice lie in implementing applying the theory of green accounting. If properly implemented as a result of the partial acceptance of the 87 recommendations featured in the climate change report then yes - the leap in knowledge is a harbinger of hope. Linked to this is the drive to reduce the consequences of pollution particularly from burning fossil fuels by slowly converting to alternative clean energy and immediate decommissioning of the inefficient Marsa power plant.
Typically, in larger states green accounting dictates that the alternative cost to convert arable land to raise corn, or sugar cane for distilling into bio fuels has to be carefully assessed. For example, Brazil leads the world in bio-fuel production and use, making about 16 billion litres per year of ethanol from its sugarcane industry. Staying over to that side of the Atlantic we notice that by popular demand, Americans are been cautioned to cut their petrol use by 20 per cent over a decade, mostly through a use of home grown fuels, such as ethanol. So the writing on the wall is pointing to start reducing our carbon footprint (which is causing irreparable damage) and one palatable way is the ample use of bio-fuels. How can we measure the effect of climate degradation on our books? The green accounting theory defines sustainable cost as the hypothetical measure of restoring the earth to the state it was in prior to a plan for heavy planting of energy crops. Yes, switching to organic solutions to generate energy is not the universal solution as in some countries it heralds its own insurmountable problems. In Thailand, for instance the government is granting vast tracts of waste land to farmers to be converted to grow oil palm for bio-fuel production. Studies show that bio-fuels produce up to 60 per cent less carbon dioxide than fossil fuels.
Bio-fuels are also making the headlines because land previously used for food crops is being turned over to bio-fuels. To properly account for the green cost of such large scale plantations, one can factor in the rise in global food prices although the latter are now reducing due to a massive drop in oil.
To conclude, the introduction of green accounting on a national scale helps us focus on the concept of capital maintenance, which also translates to our natural environment, air quality and biosphere. Quoting the climate change document one reads that the challenge is to determine what needs to be done to mitigate and embark upon adaptation measures to minimise the impact of Climate Change.

George Mangion
Partner at PKF – an audit and business advisory firm



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21 January 2009

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