Measuring Sustainability: Green Accounting and Indicators

If ordinary GDP does not capture resource depletion or environmental damage, as established earlier in this chapter, planners need alternative measures that do. This section introduces the main indicators used to bring the environment into economic measurement.

Why GDP falls short

Gross Domestic Product measures the market value of final goods and services produced in an economy over a period, but it treats the depletion of a natural resource stock (say, cutting down a forest and selling the timber) purely as a positive contribution to output — the loss of the standing forest itself, and the future income it could have generated, is never subtracted. Equally, GDP counts spending on pollution clean-up as adding to output, without first netting out the damage the pollution caused in the first place. A country can therefore show high, sustained GDP growth while its underlying natural capital — forests, soil fertility, clean water, fish stocks — is quietly shrinking, a pattern that is, in effect, borrowing against the future rather than genuinely creating income.

Green GDP (environmentally-adjusted national income)

Green GDP, or environmentally-adjusted net national income, corrects for this by deducting, from conventional GDP, the estimated monetary value of natural resource depletion and the estimated cost of environmental degradation incurred during the same period:

Because both deductions require placing a monetary value on non-market damage — a genuinely difficult exercise — Green GDP estimates vary with the valuation method used and remain far less standardised across countries than conventional GDP; even so, the exercise is valuable because it makes the environmental cost of growth explicit rather than invisible, which is precisely what plain GDP fails to do.

Other sustainability indicators

• Genuine Progress Indicator (GPI) — starts from personal consumption expenditure (a component of GDP) and then adjusts it for a wider set of social and environmental factors GDP ignores altogether — adding the value of unpaid work such as volunteering and home production, and subtracting costs such as crime, pollution, commuting time and resource depletion — to arrive at a more rounded measure of a nation's genuine economic welfare.
• Environmental Performance Index (EPI) — a cross-country ranking, compiled periodically by international research institutions, that scores countries on environmental health (air quality, water and sanitation, effects on human health) and ecosystem vitality (biodiversity, forests, fisheries, climate policy), allowing comparison of environmental performance independent of income level. …