Gernot Wagner's Answer Desk post on Green GDP suggests that governments, especially the US, don't like green accounting because it gives a negative picture of economic performance.
For example, he writes:
In the 1990s, Redefining Progress entered the picture. They developed the Genuine Progress Indicator, which makes the most far-reaching adjustments to GDP. They conclude that the growth of well-being has not kept pace with that of economic output. "GPI started declining around 1975, while GDP keeps increasing."
However, if we restrict our attention to green net national product (GNNP), instead of including various social concerns du jour, we can be much more sanguine. First, one should consider estimates showing that productivity growth swamps the depreciation of natural capital (Weitzman 1999 and 2003). But even leaving technological progress aside, things are not as dismal as they seem. To advance the conversation, let’s also leave aside accounting errors in GDP such as the inclusion of defensive expenditures that reduce pollution. How do the growth rates of NNP and GNNP differ when both are correctly defined? Does GNNP grow more slowly?
Consider the case of China, whose government allegedly focuses on economic growth narrowly defined to exclude environmental degradation and resource depletion. But if China successfully implements GNNP measurement (currently in the experimental stage), the results may indicate that China’s national income is growing even more rapidly than previously thought. Here’s why.
First note that the growth rate of GNNP can be decomposed into the growth rates of NNP and its other components. Regarding air pollution, China is at or near the peak of its EKC, and emissions per unit of output are falling (Auffhammer et al. 2004). Abstracting for the moment from other discrepancies between GNNP and NNP it can be readily shown that GNNP is growing faster than NNP, i.e. that accounting for air pollution would increase China’s growth rate!
What about the depletion of natural resources such as coal? There are conflicting forces here, but what dominates is the time derivative of the annual change in the coal stock. Inasmuch as China’s rate of coal depletion is declining, both in actuality and in the optimal path, this term is positive, again leading to the conclusion that GNNP is growing faster than NNP. Adding forestry into the picture strengthens the conclusion, even if China’s increase in the number and biomass of trees masks a substitution of lower for higher quality trees. Finally, by improving the efficiency of its environmental regulations, China has the opportunity to increase the growth rate of GNNP even further.
For more advanced economies that are on the back side of their EKG’s, have already passed through the “easy” stage of resource depletion, and are at or moving towards sustainability in renewable resource management, growth rates of NNP closely approximate those of GNNP. I conclude that at least some of the political opposition to green accounting is either irrational fear or a reaction against bad economics. It may be a bit embarrassing if environmentally-incorrect China gets green accounting before the good ol’ USA.
References
Auffhammer, M., R. Carson and T. Garin-Munoz (2004) “Forecasting China’s Carbon Dioxide Emissions: A Provincial Approach.” Department of Agricultural and Resource Economics, University of California, Berkley.
Weitzman, Martin (1999) “Pricing the limits to growth from minerals depletion,” Quarterly Journal of Economics 114(2): 691-706.
Weitzman, Martin (2003) Income, Wealth, and the Maximum Principle. Cambridge: Harvard University Press.
