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The Environment and Sustainable DevelopmentAnnex 4.1Incorporating The Depletion of Non-RenewableResources as a Cost of ProductionTwo approaches have been proposed forincorporating the depletion of nonrenewableresources as a cost intoproduction accounts. El Serafy (1981) hasproposed a ‘user-cost’ approach to distinguishbetween the true (that is, sustainable)income component of the sales revenues ofminerals and its capital component, whichis to be deducted from the gross productionvalue as a user-cost. In contrast, Repettoand his colleagues (1989) have applied a‘depreciation’ approach. Gross value addedis not affected by this method, in that theconsumption and increase of naturalresources are treated as produced capital.This makes it possible to obtain furthermodified (in addition to the depreciation ofproduced fixed assets) estimates for netvalue added of the oil and gas sector and forthe whole economy.The Depreciation ApproachThere are two proposed, and widelyapplied, models of the current net pricemethod for estimating the depletion allowanceunder the depreciation approach. The firstmodel, Net-Price II (NPII), is proposed andapplied by Landefeld and Hines for US oiland gas for the period 1941-1978; Repettoet al for Indonesia (1989); Vaze (1996) forthe UK; and Common and Sanyal (1997)for Australia. The second model, Net Price I(NOI), is suggested and applied by theUnited Nations (1993). NPI proposes thatnew discoveries from the NPII model berecorded in balance sheets, and not in flowaccounts, under ‘other volume’ changes.This is to avoid the volatility it may bring toincome measures. Another view is thatdepletion allowance is a transaction betweenagents (from non-produced to economicassets) and can legitimately be brought intothe income account, which is not the casefor discoveries (Bartelmus et al., 1993, 1994and Van Tongeren et al., 1993).Proponents of the depreciation approachmaintain that the depletion allowance ofnatural resources entry should be placed atthe level of NDP with depreciation ofman-made assets.In NPI the net profits from the naturalresource are simply deducted from GDP. Inthis method:GR = TR-COE (1)PR = GR – (rNS+Dep) (2)8 = PR/QE (3)DEPL = (QE) (4)VR = 8 (QRES) (5)Where:GR = gross rent,TR = total revenue,COE = average variable cost of extraction,including compensation of employees,materials consumed, etc.,RR = resource rent,r = interest rate, discount rate,NS = net stock of capital employed inmineral extraction valued at current replacementcost,Dep = depreciation of net stock,8 = resource rent per unit (net profit),QE = quantity of resource extracted duringthe year,DEPL = value of the annual depletion,VR = value of the resource stock,QRES = stock of resourcesIn equation (4) natural resource depletionequals the resource rent per unit (8) timesthe quantity of resource extracted during theyear (QE). But Repetto modifies equation(4) by adding the discovery of newresources to income in the year ofdiscovery; this method is known in theliterature as NPII.DEPL = 8 (QE-ND) (6)Where:ND = discoveries during the yearThe User-Cost ApproachThe handbook of Integrated Environmentaland Economic Accounting (United Nations1993), or SEEA, mentions two concepts oranalogies for viewing natural resources:fixed capital and inventory. It also suggeststwo approaches for valuing the depletion (ordepreciation) of natural resources: the netprice method and the El Serafy ‘user-cost’76 -Egypt Human Development Report 2000/2001