Geology Reference
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development of many natural resource dependent countries whose reliance increases
as the resource approaches extinction.
To avoid such scenarios, El-Serafy (1989, 2002) propose the User Cost method,
also named the El Serafy method, based on accounting income instead of revenues.
El-Serafy's view is: “if an asset is sold, the receipts from sale are not income; income
is the yield on an annuity that can be purchased with those receipts”. His approach
helps countries to reflect on environmental deterioration in their national incomes.
It has also been claimed to support weak sustainability (see Sec. 2.5.4), since it
takes into account the environmental and depletion costs for greening the national
accounts. Furthermore, the mineral endowment that a certain country once had, is
converted into other assets, keeping it for future wealth.
In this way, the method distinguishes between revenues, R and income, X from
the sale of resources. Not all revenues derived from extraction in any year, R, should
be considered as “true income”, X. This latter is the sole amount of income that could
be sustained indefinitely for consumption. A part of these revenues, R-X, referred to
as the “user cost”, “true cost” or “depletion cost”, should be invested in other assets
at a market interest rate r to generate a constant flow of future income. Thus,
national accounts should earmark the user cost in order to ensure funding for the
compensation of resource depletion and later in order to sustain prosperity and make
provision for any unplanned environmental remediation. The method is flexible,
easy to apply and engrained in the accounting procedures as a sustained income. If
a country decides not to invest in the user cost, the rates of return on extraction
investment are falsely high and induce over-exploitation. On the other hand, if the
user cost is too high, resource exploitation is not advisable. Obviously, the user
cost highly depends on the discount rate used; therefore appropriate estimations
are critical.
The formula applied is expressed in Eq. (2.1):
R
(1 + r)
(n+1)
RX =
(2.1)
where n is the life expectancy of a given resource at the current extraction rate
before total extinction. It can be obtained from reserves size estimates and their
extraction rates.
There is another approach, the “Hartwick rule”, related to the idea of compen-
sating resource depletion in the national accounts (Hartwick, 2000). The idea here
is to invest the resource rents earned in the extraction of non-renewable resources
in infrastructures, knowledge, natural capital and other types in order to offset
that depletion. If investment is greater than depletion, there is a saving. Pearce
and Atkinson (1993) coined such savings “genuine savings”. The concept has been
adopted by the World Bank and is broadly used in many countries leading to the
supporting of economic sustainability (Hamilton, 1996).
Summarising, in all the methods discussed in this section and in the SEEA , the
predominate focus centres on asset depreciation and how to solve the accounting
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