The Rise, Fall and Rethinking of Green GDP

The following article has been translated to English from the original articles in Die Volkswirtschaft (www.lavieeconomique.ch) magazine in French and German, with kind permission from Die Volkswirtschaft.

Gross domestic product (GDP) has been around for nearly eight decades.[1] Adopted during the Bretton Woods Conference in 1944 and currently compiled by nearly all United Nations Member States, national statistical offices around the world produce the System of National Accounts (SNA) and the resulting indicator of GDP. Yet, the shortcomings of GDP have been acknowledged for just about as long as GDP has existed. While GDP is a good measure of economic performance, its misinterpretation as a measure of wellbeing and welfare and as a result its misuse in policy analysis are undoubtedly problematic, particularly when it comes to the environment.

One of the most common criticisms of GDP since 1970s is that it wholly ignores the depletion and degradation of the environment. Or rather, it can treat depletion and degradation of the environment as economic output. For example, cutting down a rainforest and selling the timber would increase GDP despite having a devastating effect on long-term wellbeing and economic growth. Concerns such as these were the reason that in 1992, the Rio Summit called for the compilation of new accounts that expand the existing SNA, to integrate environment and social dimensions.

A new kind of GDP?

The official statistical community took heed of these calls. In 1993, the United Nations published the Handbook of National Accounting: Integrated Environmental and Economic Accounting as an interim report. The System of Environmental-Economic Accounting (SEEA) offered a new type of accounting which measured the environment and its relationship with the economy using the underlying concepts and definitions of the SNA. The 1993 handbook focused on monetary valuation of natural resources, allowing the cost of natural resource depletion and environmental degradation to be subtracted from gross domestic product. In particular, the handbook advocated compilation of an ‘environmentally adjusted domestic product’—also known as ‘green GDP’.

After the release of the 1993 SEEA, several countries began experimenting with the accounts and green GDP, for example the United States, China, Norway, Australia, Canada, Indonesia and the UK. Yet, green GDP failed to catch on. Some countries, such as Norway, found that the non-market valuation techniques used to value environmental depletion and degradation were too experimental and inconsistent.[2] Yet, the reasons were different in countries such as the United States and China. Green GDP focused only on deducting the cost of depletion of natural resources from GDP, resulting in a figure that would be necessarily lower than conventional GDP. In the U.S., Congress issued a stop-work order on the accounts and green GDP. It is conjectured that “environmental politics” were behind the stop-work order.[3] In China, low numbers led to resistance from some local and regional governments. This resistance, along with other concerns over methodology, led to the demise of green GDP in China in 2005.[4]

A paradigm shift

The backlash against green GDP was not wholly unfounded. Basing policies on a single indicator, no matter how well constructed, is not ideal. Thus, the next iteration of the SEEA handbook in 2003 provided a much more comprehensive framework, which had a strong foundation in monetary as well as physical accounts, such as those for energy, water and material flows as well as air emission and waste. Green GDP was no longer thought of as the end game. Instead, the SEEA could now provide the basis for a coherent dashboard of indicators, including for example indicators of efficiency and productivity, natural capital, promulgated by the 2008 Stiglitz-Sen-Fitoussi report, commissioned by the government of France.[5]

There has also been a shift away from focusing on flow-type indicators such as (green) GDP to measure sustainable growth. Stock measures have become just as important. The culmination of this thinking is evident in the recent Dasgupta Review on the Economics of Biodiversity (2021)[6] commissioned by the U.K. Treasury, which stresses that sustainability depends on the ‘stock’ of natural assets and its ability to regenerate. Just as produced capital and human capital are assets which future generations depend upon, so too are nature and biodiversity.

The current SEEA framework responds to this paradigm shift—from the singular dominance of a flow indicator, towards a dashboard approach and stock indicators. It is a system approach to organize physical and monetary data on the environment using accounting rules coherent with the economic information. Adopted by the United Nations Statistical Commission, the SEEA 2012 Central Framework advanced the framework of the 2003 SEEA to become an international statistical standard, on par with the SNA. Featuring stock and flow accounts in both physical and monetary terms, it enables a comprehensive view of the sustainability of our use of the environment and natural resources. Nearly 90 countries from all regions of the world currently compile the SEEA, including Switzerland, which publishes eight different SEEA accounts.

A new system

More recently, the United Nations Statistical Commission adopted the SEEA Ecosystem Accounting (SEEA EA). The SEEA EA takes things even further and is ground-breaking for a number of reasons. As espoused in the Dasgupta Report, the SEEA EA takes a capitals approach in portraying ecosystems as assets which provide humanity with vital ecosystem services (air filtration, carbon storage etc). These ecosystem assets are measured in the SEEA EA in physical units (extent and condition), allowing users to derive consistent and high-quality measures on ecosystem degradation.

However, the SEEA EA also provides a framework for measuring ecosystem services in monetary terms, using valuation principles consistent with the System of National Accounts. This ensures that statisticians can go beyond measuring just the negative (degradation of ecosystems, depletion of natural resources, etc.) to also recognize the positives (ecosystem services, restoration, etc). By making nature’s contributions visible, the SEEA EA allows the analysis of trade-offs between the economy and nature, which are crucial for improved decision-making.

The SEEA EA allows users to derive numerous indicators, in line with the trend towards a dashboard approach, including for example the Sustainable Development Goals indicators and the future monitoring framework of the Global Biodiversity Framework. At the same time, it can help produce a new kind of green GDP—one that includes both the positives and negatives. An indicator for just the “positives” is currently being tested through a novel headline indicator called gross ecosystem product (GEP), which measures the sum of total ecosystem services produced and can be compared with GDP. The indicator has been tested in China, where a recent pilot in Guangxi Province found that ecosystems produced a GEP equivalent to about 50 per cent of the Province’s GDP in 2017[7].

Just in time

This summer, heat waves have crippled the north-western U.S. and Canada, with mussels, clams and other shellfish boiling to death on the coast. Forest fires and flooding in Europe have devastated many communities. An acute drought has dried up once-lush Madagascar, pushing hundreds of thousands into famine.

Policy makers urgently need a way to create evidence-based policies for the climate and biodiversity which do not jeopardize economic growth. The adoption of the SEEA EA has come at just the right time.