The green gross domestic product (green GDP or GGDP) is a measure of a country's economic growth that includes the environmental effects of that growth in its regular GDP. Green GDP calculates the cost of losing biodiversity and the expenses caused by climate change. Some environmental experts prefer using physical measures, such as "waste per person" or "carbon dioxide emissions per year," which can be combined into larger measures like the "Sustainable Development Index."
Calculation
Green GDP is a way to measure a country's economy that includes the costs of harming the environment and society. It is calculated using this formula:
Green GDP = GDP − Environmental Costs − Social Costs
Environmental costs include:
• Loss of natural resources, such as oil, coal, natural gas, wood, and metals;
• Costs from harming the environment, such as polluted groundwater, eroded soil, and loss of wildlife;
• Costs to restore natural resources, such as recycling waste, restoring wetlands, and planting trees.
Social costs include:
• Poverty caused by losing natural resources, such as when resources are used up;
• Extra money spent on healthcare due to environmental harm.
This calculation can also be used for net domestic product (NDP), which subtracts the cost of wearing out tools and equipment from GDP.
Because environmental effects are often not shown in standard economic reports, it is important to turn natural resource use into money values. A method suggested by the United Nations in its System of Integrated Environmental and Economic Accounting handbook includes these steps:
If the current value of a resource is unknown, its value can be estimated by calculating the total money expected to be earned from using it in the future. This is done by adding up the value of future income and subtracting the cost of using the resource over time. This total is called the net present value (NPV).
Rationale
The idea of creating a green GDP comes from the basic problems with the traditional GDP measure. GDP only looks at total production, not the natural resources and assets that support this production. It does not consider long-term changes to these resources, like their loss or recovery. Because of this, GDP cannot show whether a country's income is truly sustainable. Richard Stone, one of the people who created GDP, said that society should study economic, social, and environmental factors, but he focused mostly on economic issues.
GDP does not fully include natural capital, which refers to Earth's resources like forests and clean water. These resources are not treated as important economic assets. Companies and leaders often overlook the long-term benefits of projects that protect or restore the environment, even though these projects can help the economy in the future. Also, the helpful effects of forests, wetlands, and farming, such as clean air and water, are not measured or valued properly because they are hard to calculate. At the same time, the harm caused by using up natural resources or increasing pollution, which can hurt a country's future ability to produce goods and services, is not included in regular GDP numbers.
A better way to measure a country's economy is needed, especially since sustainable development is important for long-term progress. GDP is often used incorrectly as the main way to measure a nation's well-being, even though it does not reflect people's quality of life. A green GDP could be a more accurate way to show how well a society is doing. Including environmental data in economic reports and creating a green GDP would help countries manage their resources and economies more wisely.
History
Many economists, scientists, and other scholars have thought about changing how economic numbers are measured to consider environmental changes. This idea started in the 1970s with work by Nordhaus and Tobin (1972), Ahmad et al. (1989), Repetto et al. (1989), and Hartwick (1990).
In 1972, William Nordhaus and James Tobin created the first model to measure the real value of household consumption, called the Measure of Economic Welfare (MEW). MEW changes GDP to include the value of leisure time, unpaid work, and harm to the environment. They also created a version of MEW called MEW-S, which became the basis for later measures of sustainable development.
Repetto studied how failing to account for the loss of natural resources in economies could lead to incorrect evaluations of economic performance. He and others developed a method called depreciation accounting, which includes environmental damage in overall measures of economic performance.
In their report, "Economic Accounting for Sustainable Development," Yusuf Ahmad, Salah El Serafy, and Ernst Lutz collected papers from workshops on how to use environmental accounting as a policy tool. They argued that traditional methods of calculating income, called the System of National Accounts (SNA), miss important parts of economic development. Anne Harrison and Salah El Serafy disagreed on how to adjust these measures. Harrison believed changes should stay within the SNA framework, while El Serafy suggested redefining what counts as intermediate or final demand. He argued that selling natural resources should not be counted as value added, and some income from this should not be included in GDP or net product. This would allow GDP to remain widely used.
In "Natural Resources, National Accounting and Economic Depreciation," John Hartwick introduced a method to calculate Net National Product (NNP) that includes the loss of natural resources. This method, which changes traditional economic measures, was later used in the System of Integrated Environmental and Economic Accounting (SEEA), created by the United Nations in 1993. The SEEA offered five ways to develop environmental accounts. Over time, the SEEA has been updated to reflect better accounting methods. This system is important because it allows countries to create full records, like green GDP, that can be compared internationally. Many countries have started using this approach.
After the SEEA-1993, many reports explored how to improve environmentally adjusted economic measures. As interest in green GDP and similar measures grows, their development will rely more on research about how to value non-market resources, such as natural services not sold in traditional markets.
In 1993, the Bureau of Economic Analysis, which tracks the U.S. economy, began working on a system called Integrated Environmental and Economic Accounts to improve GDP. Early results showed that mining companies' contributions to the economy were overestimated. Mining companies opposed these findings, and in 1995, a U.S. lawmaker passed a rule to stop the Bureau from revising GDP.
Costanza et al. (1997) estimated the value of 17 ecosystem services across 16 biomes. They calculated the total value of the biosphere, much of which is not sold in markets, to be between $16–54 trillion per year. This is larger than the world's total GNP of about $18 trillion. This shows how important ecosystem services are to human well-being and income. The researchers used methods that measured people's willingness to pay for these services.
Kunte et al. (1998) wrote a paper titled "Estimating National Wealth: Methodology and Results," explaining that including natural resources in economic accounts is both practical and necessary. They calculated a country's total wealth by adding natural capital to traditional measures. They used the concept of economic rent, which is the extra value from a resource beyond its production cost, to assign value to natural capital. By adjusting for how resources are used or replaced, they estimated a country's natural capital more accurately.
In 1999, William Nordhaus and Edward Kokkelenberg wrote "Nature's Numbers: Expanding the National Economic Accounts to Include the Environment." They studied whether the U.S. should update its economic accounts to include natural resources and the environment. A panel of experts concluded that expanding these accounts should be a top priority because it would provide useful data on economic trends, including both resource use and restoration. They emphasized that green adjustments must account for both the discovery of new resources and their depletion.
China, one of the fastest-growing countries, began studying green GDP in 1997. Local officials in Beijing found that about 75% of the city's GDP was green GDP, with the remaining 25% lost to pollution. Other cities, like Yaan and Datong, also calculated green GDP, with Yaan reporting 80% and Datong reporting 60%.
In 2004, China's leader, Wen Jiabao, announced that green GDP would replace traditional GDP as a way to evaluate government performance. Agencies like the State Environmental Protection Agency, the National Bureau of Statistics, and the Chinese Academy for Environmental Planning worked together to calculate green GDP nationwide. Major environmental issues in China included air, water, and solid waste pollution. The first green GDP report, for 2004, was published in 2006. It found that pollution caused a financial loss of 511.8 billion yuan ($66.3 billion), or 3.05% of China's economy.
Organizations
The Global Reporting Initiative (GRI) aims to encourage the sharing of information about how organizations perform in areas such as the environment, society, and company management. While the GRI operates independently, it works as a partner organization with the United Nations Environment Programme (UNEP) and collaborates with the United Nations Global Compact. The GRI creates one of the most widely used standards for reporting on sustainability, which is also referred to as ecological footprint reporting, environmental social governance (ESG) reporting, triple bottom line (TBL) reporting, and corporate social responsibility (CSR) reporting. The GRI is currently developing a global system called green GDP that will be used worldwide.
Current debate
Some people who disagree with environmentally adjusted measures, such as GDP, say it can be hard to give value to certain things that are measured. This is especially true when the environmental resource involved is not available in a regular market and cannot be bought or sold. Ecosystem services are an example of this kind of resource. When trying to value these things indirectly, there is a chance that the calculations might depend on guesses or assumptions that are not based on real data.
People who support adjusted measures might respond to this concern in two ways. First, they might say that as technology improves, better ways to measure value will continue to be developed. Second, they might argue that even though measuring non-market natural resources is not perfect, the changes made to traditional GDP are still a better choice than using GDP alone.
Another concern is mentioned in the Report by the Commission on the Measurement of Economic Performance and Social Progress, where Stiglitz, Sen, and Fitoussi note that: