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Incomplete accounting

12:46 AM March 22, 2016

THE Industrial Revolution is said to be the most important shift in human history; without it, we will not have all the things we now enjoy—from our clothing, smartphones, and even our food. The idea behind the Industrial Revolution was to satisfy human consumption through production. As we all know, production uses massive amounts of energy—energy that mainly comes from heat applied to water that produces steam.

Of all the technologies we have developed over time, the steam engine technology is, by far, the most outdated one! The impact of the Industrial Revolution is even felt in economics, as countries’ economies are measured by GDP. Investopedia defines GDP, or gross domestic product, as “the total dollar value of all goods and services produced over a specific time period—you can think of it as the size of the economy.” This idea is the brainchild of Simon Kuznets in 1937 and intended to capture all economic production by individuals, companies, and the government in a single measure, which should rise in good times and fall in bad.

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In 1959, economist Moses Abramovitz was one of the first to question whether GDP accurately measures a society’s overall wellbeing. But even after that warning, the use of GDP as an economic measure became popular after Arthur Okun, staff economist for US President John F. Kennedy’s Council of Economic Advisers, coined Okun’s Law, which holds that for every three-point rise in GDP, unemployment will fall 1 percentage point. Since then, GDP has become the accepted measure of economic size, and countries started formulating policies designed to spur industrial production.

We are driven by numbers to measure our profits without any regard for our most important asset: Earth. In our profession, accountancy, we have accounting techniques, mathematical models and statistical formulas to measure profits and future cash flows, among others. These numbers guide our economic decisions as to what is profitable and what is not.  We rely on energy to pursue our endless hunger for production and profits. To reach our desirable productivity and profit, we use more energy. So what is the cost of producing energy? If you thought of the environment, then you’re right.

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We are heavily reliant on coal, oil and natural gas which, when burned to heat up water, emits tons of carbon dioxide in the atmosphere that traps the heat in our planet, thus accelerating climate change. On top of that, we dump our wastes in the rivers and oceans. We destroy ecosystems to achieve productivity and improve our lives. We have been taking them for granted ever since we learned to exploit their blessings for our benefits. Yes, our lives are better, and the technological advances are unprecedented. But are these sustainable in the long run? No.

To address these problems, the United Nations organized climate talks in Paris last December. COP21’s objective was to create sustainable development by letting countries pledge their formulated policies in curbing carbon emissions by 2030 in order to maintain the temperature 2 degrees higher than preindustrial levels by the end of the century. The good thing is that every country wants to participate and make its pledge, but the problem is that we are still looking at the wrong numbers on economic development.

Our Earth had undergone climate change before and will inevitably survive another such change. The premise that we are saving our planet is a wrong perspective. What we need to realize is that it is not the Earth that needs saving from the effects of climate change but us humans. Also, to think that we need to curb our greed is wishful thinking. What we need to do is adjust our measurements to reflect the reality we are facing now so our decisions, driven by greed and numbers, will be environmentally and morally sound.

We can start by factoring in the losses in our environment in measuring profits and productivity. Imagine putting environmental losses in China’s GDP; what will be the effect? What about the United States? Think about the Middle East (Saudi Arabia, Qatar, Iran, Kuwait): They all have high levels of GDP, but what about the environmental losses they have caused?

Our current accounting and economic models do not take environmental losses into consideration. Imagine putting up a production facility that can generate future cash flows and a positive return of investment (ROI). Then after factoring in the environmental costs, the ROI turns negative; will that be a viable investment? What about a coal-fired power plant?  Can you see how this will affect our economic decisions?

There is a concept called environmental accounting to help us with this. Environmental accounting is a field that identifies resource use and measures, and communicates the costs of a company’s or a nation’s economic impact on the environment. Costs include those needed to clean up contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies, and waste management costs. I agree that the losses in our environment can be very difficult to measure effectively, but there are policies that can help us do that. For starters, let’s look at America’s and China’s cap and trade policy on carbon emissions; entities can now trade allowable carbon emissions to avoid penalties. The penalties are so high that they create incentives for a market for the carbon emissions trade, and this can be a start in measuring the environmental costs of conducting business.

Leonardo DiCaprio has said: “Climate change is real, it is happening right now. It is the most urgent threat facing our entire species, and we need to work collectively together and stop procrastinating.” Our academic scholars, statesmen, businessmen and other stakeholders need to notice that our current economic measurements lack information on environmental costs. To me, this is just incomplete accounting.

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Christopher Allan Ray D. Pilpa, 25, is a senior associate at SyCip Gorres Velayo & Co.

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TAGS: accounting, Energy, fuel, industrial revolution, opinion, Technology
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