There is a price to be paid for modifying our environment, extracting resources, and emitting pollutants and wastes. But conventional national economic accounts do not spell out that price. They do not make explicit many activities that entail environmental modifications or uses of natural resources with potential environmental impact. For example, measures such as the Gross Domestic Product (GDP) do not include the movement or processing of large quantities of materials that have no (or even negative) economic value. Concepts such as full-cost accounting attempt to deal with such shortcomings, but trigger contentious debates about how to price the so-called externalities involved.

This study suggests an alternative or supplementary approach. It develops a parallel set of physical accounts to describe economic activity--accounts that can be related to national economic accounts--and proposes a new summary measure, the Total Material Requirement (TMR) of an industrial economy. The TMR measures the total use of natural resources that national economic activity requires.

National economic accounts fail to capture many activities of environmental consequence in part because the natural resources involved do not become commodities that are bought and sold. These hidden flows, which are associated with extractive activities, harvesting of crops, and infrastructure development, are immense. In the four countries studied, this report finds 55 to 75 percent of the TMR arises from hidden flows. National accounts in physical terms, such as those proposed here, are required to routinely document such uses of natural resources and their potential environmental effects.

In an ever more global economy, natural resources are frequently extracted in one country, transformed into products in another, and consumed in a third. The result is that a significant portion of the natural resource use that supports national economic activity often takes place outside national borders. Except in the United States, which is largely self-sufficient in natural resources, this report finds that the foreign proportion of TMR ranges from 35 to 70 percent in the countries studied, with the larger percentages in smaller countries. These high-income countries gain the benefits of consuming imported resources, but the environmental cost of producing them falls on others, often developing countries, that supply them. This disparity may not receive adequate consideration, because national economic accounts do not adequately measure the true extent of natural resource use and potential environmental harm. While this report covers only high-income countries, the methodology developed here could be applied to document international imbalances in the physical flows required to satisfy global economic demand.

The TMR takes into account both hidden flows and foreign components of natural resource use, as well as direct inputs of natural resources into the economy. The TMRs of even very modern industrial economies are enormous. This report documents that such countries now require an annual TMR of 45 to 85 metric tons of natural resources per person--and Direct Material Inputs (DMI) of 17 to 38 metric tons per person--to produce their flow of goods and services. This total does not include use of air and water. This report also analyzes TMR figures over 20 years and finds both a general convergence among the countries studied and, in most, a gradual rise in per capita natural resources use. The implication is that meaningful dematerialization, in the sense of an absolute reduction in natural resources use, is not yet taking place.

A critical question is whether, in modern industrial countries, economic activity is becoming decoupled from natural resource use. Historically, economists have discussed materials intensity as the ratio of natural resource inputs to GDP. This report proposes a more comprehensive measure of materials intensity based on the ratio of TMR to GDP. The result shows a clearly declining pattern of materials intensity, supporting the conclusion that economic activity is growing somewhat more rapidly than natural resource use. However, materials intensity as traditionally measured (based on direct material inputs or DMI to GDP ratio) has leveled off over the past decade, implying that use of natural resource commodities may now be growing in parallel with economic growth. And examination of detailed material flows in each of the countries studied makes it clear that most natural resources are still being used in an environmentally disruptive once-through manner.

Ultimately, sustainable development will require a closer understanding of how the economic and environmental aspects of human activity interact, as well as actions based on such understanding. Conventional economic information, while useful, provides very little insight into these interactions. But the parallel set of physical accounts illustrated in this report allows comparison of economic and physical factors, which can add significantly to the information and tools for decision-making. Indicators of these physical flows, such as the TMR, can guide progress toward more efficient use of natural resources. For example, the OECD recently adopted as a long range goal that industrial countries should decrease their material intensities by a factor of 10--a profound change that is not likely to occur unless the the target and progress toward it can be explicitly measured. Using the methodology of this report, that target can be expressed as 30 kilograms per $100 of GDP, compared to the present value of approximately 300 kilograms per $100 of GDP.

Comprehensive physical accounts are also necessary to develop policies that support more sustainable industrial economies. Many environmental policies have focused on wastes and pollution--on the back end of the materials cycle--even though more than half, and as much as three-fourths, of the natural resource use occurs at the front end of the process, before natural resource commodities enter the economy. Since what leaves the industrial system as wastes is closely related to the volume of material inputs, policies that reduce the use of primary natural resources not only diminish extraction pressures, but also wastes and pollution. Similarly, policies that make natural resource use more efficient or increase recycling lower requirements and environmental impacts over the entire materials cycle.

To gain the full insights from the national materials flow accounts proposed in this report will require additional work and expanded international collaboration. This report suggests specific actions that governments and international organizations can take in the near future.