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USE OF ENVIRONMENTAL ACCOUNTING TO

ESTIMATE OPTIMAL EXTRACTION LEVELS FOR

QUARRIES: CASE OF NAKURU MUNICIPALITY

Lawrence K. Kibet

A Paper Presented to Beijer Institute of Ecological Economics for Teaching Worshop onEcological Economics to be held at Addis Ababa on !th" #!th$anuar% &''(

Abstract

)on*entional accounting s%stems ignore en*ironmental cost of economic acti*ities b%industries. An e+ample of such acti*ities is the mining industr% in ,auru municipalit%.Accounting for en*ironmental costs can aid in sol*ing for optimalle*els of e+traction in

e+tracti*e industries so as to efficientl% manage resources for sustainable de*elopment.Optimal e+traction le*els according to this stud% are le*els at which the cost ofreclamation of land from a -uarr% is e+actl% e-ual to the *alue of adjacent land itassumes that the marginal price of a -uarr% is /ero0. The approach adopted in themethodolog% is a combination of engineering cost techni-ues and *aluation method. Inthis stud%1 -uarries whose e+traction le*els ha*e reached optimal are identified. 2neimportant recommendation that arises out of the e+pected results is that when mining hasreached its optimum1 the ne+t immediate acti*it% should be to reclaim the land. Ife+traction is be%ond the optimal e+traction le*el1 the firm in*ol*ed in the mining must bepenali/ed to partl% cater for the reclamation costs and the go*ernment should taepossession of the land without an% compensation to the owner of the land. 3and

-uarr%ing was found to be en*ironmentall% unsustainable both in the short and long4runand it is recommended that this acti*it% be either banned and taen o*er b% thego*ernment or ta+ed hea*il% and closel% monitored. In the case of other two forms of-uarries gra*el and stone0 an important recommendation is each firm in*ol*ed shouldcreate sining fund5s for reclaiming the land when acti*it% in a site is wound up. Thestud% would be useful to managers of resources and en*ironment not onl% in urban areasbut also in the countr% as a whole. This stud% can be adopted in other sectors and nations.2ne main limitation of the stud% is that the data estimates were not collected b% use of aprofessional sur*e%or but through field obser*ations and inter*iews b% the researcher dueto funding constraints.

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1.0 Itr!"#ct$!

The common aggregate measures of economic performance include 6ross 7omesticProduct 67P01 ,ational Income ,I0 and le*el of emplo%ment. 8owe*er1 theseindicators ignore natural resources and en*ironmental factors.

Though resources and the en*ironment as a whole is not included in the ,ationalaccounts1 changes in the two items contribute to production and income9 and musttherefore be accounted for. The welfare of the nation:s population present and moreespeciall% in the future will be greatl% determined b% the stoc of natural resourcesa*ailable and the -ualit% of en*ironment. )urrentl%1 the production processes generall%degrades the en*ironments and depletes natural resources. This implies that the s%stem ofnational accounting used1 seriousl% under4estimates changes in the stoc of naturalresources and the en*ironment of a nation.

In this microeconomic stud%1 the case of mining industr% which is a component of the

e+tracti*e sector within ,auru ;unicipalit% is taen.

,auru town is situated in the ,orth ;idwest of Ken%a1 at the heart of the great EastAfrican ' Km from ,airobi. It is the administrati*e head-uarters of

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industrial and mining acti*ities increasingl% impacts negati*el% on the sustainabilit% ofthe growth of the town.

There are a number of sand1 gra*el and stone -uarries within the municipalit%. Theproducts from these -uarries are not onl% utili/ed in the construction industr% in the town

but also e+ported to other regions outside the municipalit%. Though these outputs are notproperl% recorded1 the final product thereof is *alued and accounted in form of buildingsand other infrastructural facilities. 8owe*er1 the negati*e e+ternalit% caused b% thesee+panding -uarries on the *alue of assets within their en*irons is not accounted for.

The en*ironmental costs can be so ad*erse that there ma% be no alternati*e use of theland if the mining acti*it% grinds to a halt. The costs of restoring the land b% filling the-uarr% can be economicall% too large. 3uch is the state of some mining pits in *ariousparts of the world. The en*ironmental costs of maintaining abandoned open mines can beastronomical. To a*oid this1 there is need of ha*ing a polic% concerning the managementof mining industr% worldwide.

The premise made here is that the e*aluation of economic performance and progressthrough gross product or income of the *arious sectors within ,auru ;unicipalit%grossl% under4estimates the negati*e contribution of the e+tracti*e industr%. For-uarr%ing to be sustainable in the short4run the marginal re*enue from a ton of rawmaterial e+tracted must be greater than the replacement of the ton of raw material. In thelong4run the acti*it% will be sustainable if the cost of refilling reclaiming of the land0 isless than the maret *alue of the land. These are the minimum conditions for sustainablemining acti*it% assumed in this stud%.

Pr!b%&'

The e*aluation of economic performance and progress through gross income of themining sector within the ,auru ;unicipalit% grossl% under4estimates the negati*econtribution of the mining industr%. 2*er time these cost ha*e accumulated to le*elswhere costs of reclaiming some of the -uarries is be%ond maret *alues henceunsustainable in the long4run. It is also a concern that probabl% some -uarr%ing acti*itiesare not en*ironmentall% sustainable e*en in the short run1 since the marginal cost offilling up the -uarr% with a ton of soil is more than the marginal re*enue from a ton ofraw material e+tracted.

Ob(&ct$)&s a" *+,!t-&s$s

The objecti*e of this stud% is therefore to estimate the costs of reclaiming land from-uarries and to sol*e for the optimal e+traction le*els of the -uarries. We will alsoe*aluate the marginal income from a ton of raw material e+tracted relati*e to themarginal cost of filling the -uarr% with a ton of soil.

;ain research h%potheses are first1 marginal income from a ton of raw material e+tractedis more than the marginal cost of filling the -uarr% with a ton of soil1 and secondl%9 thecost of reclaiming an acre of land from a -uarr% is less than the *alue of the reclaimedland.

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#st$/$cat$! !/ t-& St#"+

En*ironmental costs are obscured in con*entional accounts and %et the% are real coststhat should be accommodated b% all firms and industries. ;anagement of theen*ironmental costs will result in impro*ed en*ironment1 production and generall%

wealth of the urban population in the stud% area. This stud% would also argue for a clearerpolic% of the management of e+tracti*e industries and an% other industr% that largel%tends to e+ploit natural resources. This will also contribute to the sustainabilit% of thegrowth and de*elopment of not onl% the urban regions but also the rural. Being apioneering stud% on one of the industries in an urban centre1 other studies co*ering the*arious industries and regions will be encouraged. It is the ultimate purpose of this stud%to ha*e other studies e+panded to include all firms and sectors in the econom%. To arri*eat aggregates for the whole econom% it is important to begin with the microeconomicproduction units.

Sc!,& a" L$'$tat$!s

In this stud%1 focus is made on en*ironmental costs whose effect is reflected on thepricing of rents and sale price of the fi+ed properties around the -uarries in ,aurumunicipalit%. The -uarries sur*e%ed will be relating to sand1 gra*el and building stonesonl%.

This implies that other en*ironmental costs other than those reflected on prices will notbe addressed in this stud%. 2ther mining acti*ities will also not be a subject of the stud%.A major limitation of the stud% is that the data estimates were collected through fieldobser*ations and inter*iews b% the researcher and not a professional sur*e%or. ;oreprecise estimates b% professional sur*e%ors would enhance the authenticit% of the stud%.

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.0 L$t&rat#r& R&)$&

In the coming decades1 the continued urban population growth and especiall% thecontinued growth of the urban poor is e+pected to immensel% challenge globalsustainabilit%. As at &''#1 there were (@ cities in Africa with populations of more than

one million and it is e+pected to increase to almost ' b% &'#! D,P71 &''#0. ,auruwould be among these cities. ;ore problems of o*ercrowding1 informal settlements1inade-uate housing1 poor infrastructure etc. are bound to increase. Infrastructuralde*elopment has been slow in eeping pace with burgeoning needs of the urbanpopulation. 3ince most urban en*ironmental problems result from poor management1poor planning and absence of coherent urban policies 8assan1 #??>09 it is important thatthese dimensions be addressed in all sectors of the urban domain.

The con*entional national accounting s%stems1 e+cludes domestic production9 productsdirectl% e+tracted from communal resources for household consumption and not traded inthe maret1 and9 benefits from ecological ser*ices1 cultural1 aesthetic1 etc. Though 67P

includes income from e+tracted resources corresponding *alue of these assets lost to theeconom% is omitted. 7epletion of natural and human capital is e+cluded from totalnational wealth of a nation and hence the measures of economic performance is wrongand misleading 8assan1 &''@0.

To correct the measures of change in wealth asset accounts0 the definition of capital ise+panded to include natural and human capital. The resulting sa*ing would ha*eaccommodated mineral depletion. 8assan1 &''@0 The price of a good or ser*ice shouldrelate to the marginal social cost of its pro*ision. 3uch price which is also called full costpricing is necessar% as part of initial steps towards sustainable de*elopment =eeman1&''#0. =eeman1 though short of gi*ing case e+amples1 recommended that the mostimportant polic% measure for sustainable de*elopment in*ol*es the implementation ofsafe minimum standards of resource use which is particularl% useful for flow resourceswith critical /ones in*ol*ing threats of irre*ersibilit%.

3ustainable de*elopment sees to meet the needs of the present without compromisingthe needs of future generations. In other words1 the present generation must lea*e the air1water and natural resources as pure and unpolluted as when it found it. 3trongsustainabilit% clarifies that in the case of renewable resources annual off4tae must beept e-ual to the annual growth increment while in the case of non4renewals depletionshould be at a rate e-ual to the de*elopment of renewal substitutes 7al%1 #??>0. Thismeans that stoc of natural capital should not be reduced below a le*el that generatessustained %ield unless good substitutes are currentl% a*ailable.

3ustainable de*elopment therefore1 has to be financed in such a manner as to compensatefor future depletion of e+haustible resources 8assan1 &''@0. An e+ample where policiesha*e ensured sustainabilit% is of mining in 3outh Africa1 where the capital component))0 was full% rein*ested in alternati*e forms of capital Blignaut and 8assan1 &''&0.According to 7asgupta and ;aler1 the correct inde+ of checing if de*elopment issustainable is wealth. When accounting prices that reflect trade4offs among present and

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future well4beings and among contemporaries are used to determine well4being1 wealthbecomes a good inde+ for showing whether de*elopment is sustainable or not. Po*ert%causes a societ% to el out li*ing through ad*erse e+ploitation of resources and this is thestate of the populations in the Less 7e*eloped )ountries L7)s0 7asgupta G ;aler1#??!0.

In economics1 the centre of the en*ironmental sustainabilit% problem lies within thepricing of en*ironmental consideration and that en*ironmental degradation results fromlimitations of the price mechanism. 3ince prices are wrong it is important to now howwe can correct them. ;aret based instruments can pla% *ital roles in en*ironmentalpolic% since the% can reconcile en*ironmental concerns and de*elopment needs. A primeobjecti*e of go*ernment polic% to finance and promote en*ironmental sustainabilit% is toestablish a right incenti*e structure de ;oor1 #??>0. The paper b% de ;oor was howe*ertheoretical and not applied. Economic incenti*es are ideal for shifting both beha*iour andpatterns of both production and consumption towards sustainabilit%. E+isting polic%distortions in form of subsidies or ta+ wai*ers must first be remo*ed more specificall%

go*ernment inter*entions that subsidi/e waste and en*ironmental degradation0. 3econdl%1the go*ernment can inter*ene through ta+ation or -uota restrictions to increase prices oflow4priced commodities whose production contribute towards en*ironmental degradationor depletion of non4renewable resources. Ad*erse e+ternalities which are not accountedfor01 in the production process or consumption0 of a product9 results in a distorted lowprice.

;arginal anal%sis refers to the comparison between incremental benefit and incrementalcost of an economic action and is fundamental to the economic approach for efficientallocation of resources. ;ost efficient outcomes are achie*ed b% e-uating marginal gainsto marginal costs assuming that the prices of outputs and inputs are correctl% *aluedAllen1 &''&0.

Accounting for e+ternalities has been adopted in the microeconomic le*el within the firmin h%droelectricit% EPA1 #??>01 health sector EPA1 &'''01 chemical and oil companies3hields1 #??a0 and electroplating operations EPA1 #??b0 among others. The studiessampled1 applied *arious en*ironmental accounting techni-ues to e*aluate en*ironmentalcosts of economic acti*ities in an industr%. The results showed e+istence of positi*een*ironmental costs in all cases with an implication that most economics acti*ities ha*een*ironmental costs which are %et to be accounted for.

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2.0 M&t-!"!%!3+

Theoretical FrameworThere are a di*erse number of *aluation tools that emplo% one or more approaches to*alue en*ironmental liabilities. Among the tools are9 actuarial techni-ues1 professional

judgment1 engineering cost estimation1 decision anal%sis techni-ues1 modeling1 scenariotechni-ues and *aluation methods ;cLaughlin1 #??>0. In this stud%1 engineering costestimation techni-ue and *aluation method is used in combination. ;arginal anal%sis isalso emplo%ed.

The cost of reclaiming the land restoring it to it former state0 is estimated and comparedwith the maret *alue it would fetch.

A wa% of lea*ing -uarr%ing grounds as pure and unpolluted as when it was found is b%refilling it with material that is a close substitute to the material e+tracted. This is a step*er% necessar% in the log4run. The feasibilit% of this reclamation depends on the *alue of

the land.

7iagram #

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'

2ptimal le*el of e+traction

7ata collection7ata of interest include9 si/e of acreage of -uarr%1 *alue of land around the -uarr%1 *alueof rental housing around the -uarr% per *alue of house.

Huantit% of raw material H

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will also be current to reflect the real price assuming it to be constant o*er time. The pricebeing a simple a*erage incase of e+istence of *arious -ualities of the final product.

A primar% data collection schedule was used and data was collected from the -uarr% sitesthrough obser*ations and inter*iews. && sand -uarries1 ( gra*el and bric4stone -uarries

were *isited. Their si/es ranged from 4 @! acres1 # " (' acres and 4 ! acres for sand1gra*el and bric4stone -uarries respecti*el%.

4.0 5ata S#''ar+ a" Aa%+s$s

3and -uarries3and is sold at the -uarries within the range of KE3 &'' " KE3 ('' per ton. The a*erageprice is therefore estimated at KE3 @'' J (0 per ton. Labor costs per ton of sanda*erages KE3 #!'. The a*erage cost of importing one ton of soil to the -uarr% site rangesfrom KE3 #!' " KE3 (!'. A*erage cost is hence estimated to be KE3 @'' appro+. J (0.The net re*enue to the -uarr% owner is therefore appro+imatel% KE3 #!' J &0. Taingthese as the marginal re*enue b% -uarr% owners from sale of sand and the marginal cost

of replacing the e+tracted material9 we easil% see that the marginal cost far e+ceeds themarginal re*enues. This is interpreted to mean that -uarr% owners are not in a position ofmeeting the costs of not onl% reclaiming the -uarr% but also replacing a marginal rawmaterial e+tracted. 3and -uarries in ,auru municipalit% ha*e therefore1 not onl%e+ceeded optimale+traction but are also not en*ironmentall% sustainable. The *alue ofland around the sand -uarries a*erages KE3 !'1''' J #'1'''0 per acre. This means thatthe costs of reclamation should not e+ceed KE3 !'1''' per acre. According toestimates1 all sand -uarries ha*e reclamation costs e+ceeding this.

6ra*el -uarries6ra*el is sold at the -uarries within the range of KE3 #1@'' " &1!''. The a*erage price isKE3 #1?'' appro+. J &!.@0 per ton. Production costs per ton of gra*el ranges from KE3!' " #&'' and a*erages KE3 ?!. The a*erage cost of importing one ton of soil to the-uarr% site is also estimated to be KE3 @'' appro+. J (0. The net re*enue to the -uarr%owner is therefore appro+imatel% KE3 ?&! J#&.@0. 3ince marginal costs are less than themarginal re*enues9 the acti*it% is en*ironmentall% sustainable. The gra*el -uarries in,auru municipalit% are relati*el% shallow and ma% not ha*e e+ceeded optimale+traction. The *alue of land around the gra*el -uarries a*erages KE3 !''1''' J >1>>0per acre. According to rough estimates1 onl% one gra*el -uarr% has reclamation costse+ceeding this1 though its land *alue is greater estimated at KE3 C''1'''0.

3tone5hardcore -uarriesBric4stones are sold at the -uarries at a range of KE3 C'' " #1>'' per ton and ana*erage price of appro+imatel% KE3 #1&'' J #@.@0 per ton. A*erage cost of importingone ton of soil to the -uarr% site being KE3 @'' J (0. )ost of labor per ton of stonesranges from KE3 &!' " !' and a*erages KE3 !''. For e*er% ton of bric4stonesproduced1 a ton of b% product of hardcore is produced. 8ardcore fetches a range of KE3#'' " @'' per ton with an a*erage price of KE3 &'' per ton J &.0. The net re*enue tothe -uarr% owner per ton of raw material e+tracted is therefore appro+imatel% KE3 ?'' J#&0. 3ince marginal costs are less than the marginal re*enues1 bric4stone mining in

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,auru ;unicipalit% can be said to be en*ironmentall% sustainable. The *alue of landaround the bric4stone -uarries a*erages KE3 @''1''' J (1'''0 per acre. From dataestimates1 all bric4stone -uarries ha*e reclamation costs less that the abo*e *alue cost.Interpreting the results we can conclude that pri*ate de*elopers will find it economicall%feasible to fill up the stone -uarries and hence bric4stone e+traction in ,auru

;unicipalit% is also en*ironmentall% sustainable in the long"run. This stud% recommendscreation of sining fund5s at a rate of KE3 @'' &''@ prices0 for e*er% ton of materiale+tracted for land reclamation b% firms in*ol*ed in stone -uarr%ing.

6.0 C!c%#s$!s a" R&c!''&"at$!s

3and -uarries3ince marginal re*enue b% -uarr% owners from sale of sand is less than the marginal costof replacing the e+tracted material9 we easil% see that the marginal cost far e+ceeds themarginal re*enues. This means that the costs of reclamation of land filling up the-uarries with roc or soil0 in each sand -uarr% e+ceed re*enues thereof and the acti*it% istherefore an en*ironmental disaster. 3and har*esting in ,auru ;unicipalit% is hence

en*ironmentall% not sustainable both in the short and long4run and should either betotall% banned or a ta+ of not less than KE3 @'' per ton be imposed b% the go*ernment toco*er reclamation costs. 2ut of the e+pected *alue of reclaimed land1 it is implied that nopri*ate de*eloper will find it economicall% feasible to fill up the -uarr% and thus1 most ofthe sand -uarries will ne*er be filled unless the go*ernment or local authorities inter*enesto meet the costs or subsidi/e pri*ate de*elopers. An alternati*e is to turn the sand-uarries into garbage pits so that the% can be reclaimed in the future.

6ra*el -uarries6i*en that the marginal costs are less than the marginal re*enues9 through en*ironmentalaccounting and creation of sining fund for reclamation1 -uarr% owners can meet thecosts of reclaiming the -uarr%. The gra*el -uarries in ,auru municipalit% are relati*el%shallow and ma% not ha*e e+ceeded optimal e+traction. 6ra*el mining in ,auru;unicipalit% is hence en*ironmentall% sustainable in the short4run and needs to beproperl% managed and monitored. Interpreting the results from land *alue1 we canconclude pri*ate de*elopers will find it economicall% feasible to fill up the gra*el-uarries and hence gra*el -uarries are en*ironmentall% sustainable also in the long"run.This stud% recommends that firms in*ol*ed in gra*el -uarries should create siningfunds1 at a rate of KE3 @'' &''@ prices0 for e*er% ton of material e+tracted for futureland reclamation.

3tone5hardcore -uarries6i*en that the marginal costs are less than the marginal re*enues1 b% creating siningfund for reclamation1 -uarr% owners can meet the costs of reclaiming the -uarr%. Bric4stone mining is en*ironmentall% sustainable in the short4run and needs to be properl%managed and monitored. From the *alue of land around the bric4stone -uarries we canconclude that pri*ate de*elopers will find it economicall% feasible to fill up the stone-uarries. 8ence bric4stone e+traction in ,auru ;unicipalit% is also en*ironmentall%sustainable in the long"run. This stud% recommends creation of sining fund5s at a rate of

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KE3 @'' &''@ prices0 for e*er% ton of material e+tracted for land reclamation b% firmsin*ol*ed in stone -uarr%ing.

It is interesting to note that owners of sand -uarries are relati*el% poor compared to theother forms of mining. 2wners of other -uarries are relati*el% wealthier that those of

sand -uarries. This supports the argument b% 7asgupta and ;aler &''#0 that the correctinde+ for checing if de*elopment is sustainable is wealth.

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R&/&r&c&s

Allen1 W.9 ;. Kil*ington9 ). ,i+on and $. eabsle% &''&0 Sustainable DevelopmentExtension. ;AF Technical Paper ,o. &''&5'@ ;inistr% of Agriculture and Forestr%1 ,ewealand.

Baile%1 P.E1 3. ;cLaughlin1 39 8. Elwood and ;.A. 3pit/er #??>0 Valuing PotentialEnvironmental Liabilities for Manegerial Decision-Making: A evie of Available

!ec"ni#ues$ En*ironmental Accounting Project1 D.3. En*ironmental Protection Agenc%1Washington1 7.).

7al% 8. #??>0 %e&on' gro(t": !"e Economics of Sustainable Development$ BeaconPress.

7asgupta1 P and ;Mler K.6. #??!0 NPo*ert%1 Institutions1 and the En*ironmental

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