I. INTRODUCTION The concern over the environment is not new. But the development policymakers have recently recognised that failing to take the costs of environmental damage into account will slow down the process of raising incomes and the well-being of the people. This recognition is in view of the fact that economic development in both industrialised and developing countries, especially during the past half century, has not been environmentally sustainable. The current debate regarding the environmental sustainability of economic development has even challenged the very question of development. The measurement of per capita income is no longer accepted as a sufficient indicator of people's well-being when it comes to the quality of life and its sustainability over time. The true. growth rate in the Gross National Product (GNP) of a country will definitely be lower than the absolute rate if the depreciation of natural resources resulting from environmental degradation is allowed. The Indonesian growth rate of 7.1 percent in 1971-84 has been reported to be actually 4.0 percent when the depreciation of three resources i.e., petroleum, timber, and soil were taken into account [Warford and Partow (1989)].