[We] must ensure that ordinary citizens in all countries actually benefit from tradeÑa trade that...protects the environment.

President William J. Clinton

State of the Union Address, 19 January 1999

The hullabaloo that was the World Trade Organization's millenium meeting in Seattle has shown us that ordinary people have serious misgivings about the multilateral trading regime-both the rules and the process. Future progress in trade liberalization will depend on convincing the wider public that trade agreements are good for the environment and good for development (including labour and human rights), not just GDP. This is more than a public relations challenge. The concerns voiced by the Seattle protesters-some of them, anyway-raise profound intellectual questions.

A decade has passed since Wasting Assets, a study of Indonesia by Robert Repetto and colleagues at the World Resources Institute, drew widespread attention to the potential divergence between gross and net measures of national income. This was by no means the first ‘green accounting’ study. Martin Weitzman, John Hartwick, and Partha Dasgupta and Geoffrey Heal had all conducted seminal theoretical work in the 1970s. But the World Resources Institute study demonstrated that data were adequate even in a developing country to estimate adjustments for the depletion of some important forms of natural capital and that the adjustments could be large relative to conventional, gross measures of national product and investment. The adjusted, net measures suggested that a substantial portion of Indonesia's rapid economic growth during the 1970s and 1980s was simply the unsustainable ‘cashing in’ of the country's natural wealth.

The paper compares the total costs of abating CO2 emissions in two different intertemporal trading systems. In addition, the paper gives an analysis of how abatement costs are distributed among different countries/regions. It is shown that the total cost of implementing a climate treaty is considerably reduced in a system where both banking and borrowing of quotas are allowed compared to a system where quotas only can be banked. The analysis also shows that the total cost of implementing a climate treaty can be reduced in a banking system by compensating the developing country parties for participating in the CO2 emission reductions such that their net costs of making emissions reductions after sale/purchase of quotas equal zero.

This paper studies soil depletion incentives in a dynamic economic model under two different sources of revenue uncertainty (output and price risk). The focus is on the long-term effects of risk-averse preferences when farming decisions have implications for both expected short-run production and natural topsoil fertility. The analysis shows that the risk properties of the stock variable are crucial for the results arrived. The presence of risk preferences is found to improve soil conservation incentives in a low-input farming system, independent of the source of revenue risk considered. The only case for which soil conservation incentives are weakened is for high-input farming systems under price uncertainty.

JEL classification: Q12, Q20, D81

Free trade may not improve welfare when environmental distortions exist. We study the coordination of trade and environmental policies when the distortion is loose property rights governing resources. Using the dual approach of Dixit and Norman (1980), we trade out ‘iso-welfare’ curves in the space of the degree of environment distortion and the level of the import tariff. We use these curves to find necessary and sufficient conditions for disproportionate reforms, piecemeal or discrete, to be welfare improving. We also find that the needed reduction in the distortion to make trade welfare improving increases as the environmental stock increases, the productivity of the environmentally intensive good increases, or when the country is a large exporter of the environmentally intensive good.

The present paper gives an overview of the theory of green national accounting. Three purposes of green national accounting (measurement of welfare equivalent income, sustainable income, or net social profit) and two measures (Green NNP and wealth equivalent income) are considered. Under the assumption of no exogenous technological progress, Green NNP is shown to equal wealth equivalent income if there is a constant interest rate or if consumption is constant. It is established as a general result that sustainable income [les ] wealth equivalent income [les ] welfare equivalent income, while Green NNP [les ] welfare equivalent income under no exogenous technological progress and a constant utility discount rate. Green NNP is shown to measure gross social profit rather than net social profit.

This paper uses a model of an inland fishery in Bangladesh to investigate the relationship between poverty and resource sustainability in a specific case. It makes use of detailed fieldwork to build a numerical model of fishery decision making, which incorporates extensions to standard fisheries models. In particular, it includes fish migration between lease units and models the choice of fishing gear, as well as fishing effort, over the year. The modelling of fishing gear choice allows an analysis of the effect of management policies on employment in the fishery, a major factor that influences poverty in the locality. The numerical results show that while some simple policies to improve sustainability are likely to increase poverty, it is possible to design policies which affect gear choice and lead to reduced poverty without harming the sustainability of the resource.

This paper provides a conceptual and empirical general equilibrium framework for the analysis of the impact of trade reform on welfare and the environment. The analysis is applied to Côte d'Ivoire explicitly considering externalities affecting biomass (natural vegetation), which is shown to be an important factor determining agricultural productivity.

The simulation general equilibrium analysis shows that the agricultural output composition effect dominates the agricultural expansion effect for the case of complete trade liberalization. Thus, in this case trade liberalization causes a significant improvement in the rural biomass stock by cutting land area cultivated, increases agricultural productivity, and induces dramatic welfare gains. That is, trade liberalization is a win–win type of policy in this case. However, partial trade liberalization that only reduces protection to non-agricultural goods (and does not reduce tariffs to agricultural import substitutes and does not reduce export taxes) causes a further deterioration of the biomass resources and reduces welfare.

Theoretical issues arising in maximin and utilitarian programs are considered in order to shed light on the merits of various concepts of income and types of environmental accounting as guides for environmental policy. The accounting prices for sustaining an economy obey Hartwick's rule but are inconsistent with the principles of national accounting. Moreover, they would be formidably difficult to calculate. Green net national product is an approximate index of welfare in a utilitarian economy which maximises future discounted utility flows. These conclusions hold even if underlying conditions are non-autonomous.

JEL Codes: Q3, E2

For guidance in determining which items should be included in comprehensive NDP (net domestic product) and how they should be included, reference is often made to the linearised Hamiltonian from an optimal growth problem. The paper gives a rigorous interpretation of this procedure in terms of a money-metric utility function linked to familiar elements of standard welfare theory. A key insight is that the Hamiltonian itself is a quasilinear utility function, so imposing the money-metric normalisation is simply equivalent to using Marshallian consumer surplus as the appropriate measure of welfare when there are no income effects. The twin concepts of the ‘sustainability-equivalence principle’ and the ‘dynamic welfare-comparison principle’ are explained, and it is indicated why these two principles are important for the theory of national income accounting.

This article develops a framework for environmental–economic decision-making in a single project case that includes the ecological sustainability criteria, environmental costs, natural resource scarcity prices and local peoples’ preferences and presents a case study of the lowland irrigated agriculture system. The geographic information system (GIS) technique has been used for evaluating ecological criteria and integrating information for use in the cost–benefit analysis at different levels of computation process. The environmental costs and economic value of water associated with the lowland irrigated agriculture are estimated using both the direct and indirect economic valuation approaches. Various sets of alternatives were designed for promoting sustainable use of resources, and the net present value is estimated in each of these cases by incorporating environmental costs and economic values of water obtained from different methods. The cost–benefit analysis (CBA) carried out in these different cases indicated that diversification of crops, rather than the conventional monocropping system, would promote sustainable resource use and generate higher benefits to the farmers and society, if external costs, such as environmental costs and scarcity value of irrigation water, and ecological sustainability criteria are also considered in the economic decision-making process. The results of the case study also indicated that sustainability criteria could well be incorporated into the CBA in a single project case by addressing local people's concerns, resource scarcity values and ecological sustainability criteria with the use of spatial analysis techniques such as GIS.

This paper develops a simple model to investigate linkages between trade and environmental policy. In the case of purely local pollution, trade liberalization without constraints on environmental policy induces a non-cooperative game between countries in pollution policy. Without any agreement on environmental policy, trade negotiations are unlikely to lead to a point on the Pareto frontier. When pollution is global, countries may be expected to disagree on linkages between trade agreements and environmental agreements. Countries importing pollution-intensive goods have an incentive to try to link trade agreements with environmental agreements, while countries exporting pollution-intensive goods have an incentive to try to obtain a binding commitment to free trade prior to negotiations over global pollution.

This paper is about net national product (NNP). We are concerned with what NNP means, what it should include, what it offers us and, therefore, why we may be interested in it. We show that NNP, properly defined, can be used to evaluate economic policies, but we also show that it should not be used in any of its more customary roles, such as in making intertemporal and cross-country comparisons of social well-being. We develop such indices as would be appropriate for making those comparisons. In particular, we show that welfare comparisons should involve comparisons of wealth. Writings on the welfare economics of NNP have mostly addressed economies pursuing optimal policies, and are thus of limited use. Our analysis generalises this substantially by studying economies whose governments are capable of engaging only in policy reforms. We show how linear indices can be used for the evaluation of policy reform even in the presence of non-convexities in the economic environment. The analysis pertinent for optimising governments are special limiting cases of the one we develop.

The literature on green NNP has widely interpreted NNP as ‘constant-equivalent consumption’. We show that this interpretation is wrong. It is the Hamiltonian that equals constant-equivalent utility. Since both theory and empirics imply that the Hamiltonian is a non-linear function of consumption and leisure, the Hamiltonian should not be confused with NNP.

Community forestry projects in Ethiopia have been implemented using the top–down approach, which may have contributed to the failure of most of these projects. The so-called community plantations practically belonged to the government and the labour contribution of the local communities in the establishment of the plantations was mainly in exchange for wages. In this paper, we use the contingent valuation method to examine the determinants of the value of community forestry in rural Ethiopia and its feasibility, when the plantations are established, managed, and used by the communities themselves. The value elicitation format used is discrete question with open-ended follow-up which is closer to the market scenario our respondents are familiar with compared, for example, with the single discrete choice format. Unlike most other studies, we use a tobit model with sample selection in the empirical analysis of the bid function to correct for the effect of excluding invalid responses (protest zeros, outliers and missing bids) from the analysis. The analysis of the bid function shows that household size, household income, distance of homestead to proposed place of plantation, number of trees owned and sex of household head are significant variables that explain willingness to pay. We also find that there are significant differences in willingness-to-pay across sites. It is hoped that this study contributes to the limited empirical literature on community forestry in developing countries by indicating some of the conditions under which community plantations will be acceptable and feasible.

A number of recent papers have found that certain measures of pollution worsen and later improve as income per head increases. It is widely believed that the downhill portion of this inverted-U curve reflects an induced policy response; that, as incomes rise, citizens demand improvements in environmental quality, and that these demands are delivered by the political system. In this paper we find that, for a number of pollution variables, an increase in civil and political freedoms significantly improves environmental quality. For other pollution variables, however, we find that freedoms have no effect. The former finding suggests that political reforms may be as important as economic reforms in improving environmental quality worldwide. The latter finding hints that the observation that pollution levels fall with income, once income becomes high enough, may not always reflect an induced policy response.

International negotiations for an agreement to reduce the emission of greenhouse gases have not produced cost-effective policies for reducing emissions, not least because they are unlikely to prevent ‘leakage’ through a re-location of carbon-intensive activities to poorer countries. An alternative or supplementary approach that is more likely to achieve at least some emission reductions, and at the same time generate national and global economic benefits rather than costs, involves lowering coal subsidies and trade barriers. Past coal policies have encouraged excessive production of coal in a number of industrial countries and excessive coal consumption in numerous developing and transition economies. This paper documents those distortions and outlines the circumstances under which their reform (currently under way in some countries) could both improve the economy and lower greenhouse gas emissions globally. It then quantifies the effects on economic activity as well as global carbon emissions, using the G-Cubed multi-country general equilibrium model of the world economy. Both the gains in economic efficiency and the reductions in carbon dioxide emissions that could result from such reforms are found to be substantial—a ‘no regrets’ outcome or win–win Pareto improvement for the economy and the environment.

Green income accounting models are designed to appropriately value changes in a country's natural resource (natural capital) base. However, green NNP is useful as a guide for domestic and international policy only to the extent that it accurately reflects the economic goals and policy options of policy makers. For example, international policy designed to slow natural capital depletion in a developing country is more effective if policy makers recognize the developing country's perceived income effects of the policy. Traditional green accounting models do not satisfy this criterion because they are based on the assumption that policy makers are either not concerned with the distributional consequences of policies, and/or are not limited in the instruments available to them. We present an alternative green NNP measure that reflects distributional goals and policy implementation. Using this measure, the depletion (accumulation) of natural capital stocks in excess of economically efficient rates may increase income.