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
Most recently, economists have talked about the need for a ‘Green
GDP’: what would this look like? How would it be different from
the current method of income and expenditure accounting?
https://www.youtube.com/watch?v=K3ng196_mDY
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
Adds natural resources, labor resources, education and
entrepreneurship
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).
5Voices:
Greening the Gross Domestic Product. Garrett C. Groves and Michael E. Webber. 2010
**So why was this proposed adjustment abandoned after
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 his initial attempt to account for resource
?
depetion
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?
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.