Is GDP as currently used not an effective measure of economic and environmental

progress?

I. Why is a Green GDP a better measure of economic growth and progress?

II. How should a green GDP be measured?

III. What is the Genuine Progress Indicator?

IV. Can public policy change the way economic/environmental progress is measured?

WHY?Groves and Webber in “Greening the Gross Domestic Product” pose the question of whether a country’s environment and resources, along with pollution, failing infrastructure and depletion of resources – should be counted in a nation’s GDP

They argue that the U.S. economy is facing its greatest challenge since the Great Depression – in the form of climate change and degradation of the environment.

What they propose is to measure the economy’s progress in terms of protecting the environment.

Creating a single indicator capable of reflecting both economic prosperity and the health

II. How Should a Green GDP be Measured?

• According to Groves and Webber, measurement needs to move away from the current emphasis on national income accounting and toward a balance sheet system1

• “where natural capital and resource depletions are netted out (the way companies depreciate their assets), and pollution costs are negatively valued.

• What does this mean?

1. Lost resources are treated as depreciation the same way that capital equipment is in traditional GDP measurement.

2. Costs imposed by pollution of air, water and land are counted against growth. These are costs that detract from growth.

What are the challenges in adopting this kind of measurement into GDP?

• It requires “dividing the natural environment into quantifiable units” and…

• Allocating a market value to each unit. (Ex: allocating a market value to an acre of land that is part of a larger parcel of 60 acres)

• So depletion of a resource would be viewed as a negative externality. (*define)

• But an important question is “how much are they worth”? And who determines their value? (*how to answer this??)

• This needs to not be a subjective assessment but an objective measure.

One proposal advanced by Economists is the creation of a ‘Green Economic Indicator’ that means…

Putting a price on oceans, the atmosphere and other shared resources.

But what could be a major problem with this idea?? (privatization of natural resources?)

One solution has been the pricing of carbon emissions, a policy that is currently not required under U.S. policy.

In 2010, Congress began to consider legislation that would do just that: putting a price on emissions commoditized “with a price somewhere between $10 and $100 per metric ton of emitted carbon dioxide.”2

2 Voices: Greening the Gross Domestic Product . Garrett C. Groves and Michael E. Webber. April 1, 2010

“Greening the GDP” points out, for instance, that the damage from coal fired power plants costs 3.2 cents per kilowatt-hour of power produced

…while the price for wholesale coal-fired electric power is estimated to be between 2 to 4 cents per kilowatt hour.

*So what is the price of air pollution relative to the price of creating coal fired power?

GDP includes the output of coal fired power in its measure of economic output – making it a positive contribution to the nation’s GDP.

However, the damage associated with its production is not included – this should be included as a negative contribution to GDP. *How would such a negative contribution be measured?

III. The Genuine Progress Indicator (GPI)

Another methodology that has been advanced is that of the Genuine Progress Indicator.

• Consolidation of environmental and economic factors into a single Green GDP number would yield the Genuine Progress Indicator

• This begins with normal calculation of GDP before then making a series of adjustments to correct for shortcomings in GDP.3

• The GPI also subtracts from GDP other factors such as the estimated costs of crime, losses of leisure time, and money borrowed from abroad. *How are these adjustments relevant to a ‘green GDP?

Voices: Greening the Gross Domestic Product. Garrett C. Groves and Michael E. Webber. 2010

(1) Green Growth: The What, Why and How - Professor Paul Elkins

https://www.youtube.com/watch?v=4eaYRjS-yuQ

Another component: Natural capital accounting: a process in which the value of natural resources is accounted for in a nation’s national accounting system.

How would such a plan work?In what ways or in how many ways does a natural resource contribute to a nation’s wealth and output?

(2) Natural Capital accounting

https://www.youtube.com/watch?v=iDixluiUSN0

IV. Can public policy change the way economic & environmental progress is measured? Examples

1. China has been one of the first nations to estimate an environmental adjustment to its GDP.4

China’s economy grew at a double-digit rates between 2003 and 2007, and has been close to 8 percent annually since then.

Growth was fueled in part by the construction of two coal-fired power plants each week since 2007, resulting in massive pollution, which rapidly became the second leading cause of death in the nation5 according to Groves and Webber. However….

4Voices: Greening the Gross Domestic Product. Garrett C. Groves and Michael E. Webber. 2010

The nation quickly recognized the problem that its rapid growth was creating, acknowledging the environmental challenges rapid growth was creating.Beginning in 2004, the nation initiated a “Green GDP Project” The new GDP would:

1. Subtract the estimated costs of pollution from estimated GDP

2. Account for resource depletion.

3. Begin to estimate a range of possible methods for estimating environmental costs and their proportion of national GDP

In 2004, the first report was issued stating that environmental pollution accounted for 3.05 percent of GDP in that year.

However, this was the first and last Green GDP estimate that was produced. Why? Possibly the priority of job creation and social stability as public policy was viewed as a more pressing goal than addressing pollution – at least for now.

2. United States

In 1993, the Bureau of Economic Analysis took steps toward a green accounting measure for U.S. GDP entitled “Integrated Economic Accounts.”

Methodology: analyzed some of the most easily measured commodities in the economy, such as coal, petroleum and mineral resources.

Results? Indicated that “by failing to consider the impacts and depleted assets induced by mining, the sector’s benefits were overestimated5” (in GDP).In other words, the depletion of resources caused by the production of these commodities needed to be subtracted from GDP – which would yield a lower GDP estimate.

5Voices: Greening the Gross Domestic Product. Garrett C. Groves and Michael E. Webber. 2010

**So why was this proposed adjustment abandoned after this initial attempt to account for resource depletion?

Underestimates the nation’s growth. Why would policy makers not want to adopt a policy that would indicate a slower rate of economic growth?

Outcome: In 1995, Congress attached an amendment to the congressional appropriations bill preventing the Bureau of Economic Analysis from revising its methodology in GDP calculations.

*What interests might have influenced this policy outcome?*Why??

Future direction for public policy

1. Neither of the measures adopted by China or the U.S. Bureau of Economic Analysis took much time. They were able to derive these estimates within a year – suggesting that making such adjustments won’t require a major overhaul of how GDP is measured.

2. These measures have the potential to scrutinize the traditional methods of estimating how economies are growing.

The challenge: overcoming political and entrenched industry opposition to such changes.