Banking & Finance, Economic Development, and Higher Education

Professors make case for ‘green GDP’

The method takes into account the economic impact of resource depletion.

February 20, 2015
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Standard practice for determining a country’s economic growth and overall wealth has been to look at gross domestic product, but two Calvin College professors argue GDP is an outdated measurement tool that doesn’t take into account the value of natural resources or the impact of their depletion on an economy.

Calvin professors Matt Heun (engineering) and Becky Haney (economics), along with Michael Carbajales-Dale, environmental engineering and earth sciences professor at Clemson University, recently published the book “Beyond GDP: National Accounting in the Age of Resource Depletion,” which makes the case for a biophysical approach to economics.

A biophysical approach, better known by the term “green GDP,” includes natural resources, such as minerals, fossil fuels, forests and fresh water. It would place a value on this natural capital as well as measure the economic impact of a resource’s depletion on the economy.

For instance, a tree might be valued at a certain dollar figure, but a whole forest provides much more in value than the cumulative total of the trees’ dollar value, because forests provide recreation, habitat and carbon sequestration.

“GDP adds up everything that gets bought and sold in the economy,” Haney said. “A green GDP would augment that and take into account the types of costs that are being borne by the environment through those things being produced and used. It would take into account what we are using from the environment when we deplete natural resources that we will not have available in the future.”

Haney said the book emphasizes the importance of not just looking at the income statement but the balance sheets, as well.

“We examine what our assets are, including our natural assets, and the implications of investment in those assets for what types of draws we will have in the future,” she said.

Carbajales-Dale makes a particularly important argument for why GDP is no longer the best choice for measuring an economy’s success.

“Natural resources are now constrained,” he said. “The way we currently look at economics was built for the 20th century, when we were still on the upside of resource extraction.”

Heun said there are many direct implications for businesses.

“The decisions we make today about the kinds of machines and buildings we put in our economy are going to affect us for decades to come,” he said. “If you put a furnace that burns natural gas (in a building), that means you are going to have a natural gas demand for the next 20 years. … If it can use steam generated from a solar system — that means something different.”

In the United States, the idea of a green GDP has been around since the 1970s, but by the mid-1990s, as this type of accounting was gaining momentum, it experienced strong opposition from industries that could be negatively impacted by its use in determining the United States’ economic growth.

Haney said the U.S. Bureau of Economic Analysis had been tasked with developing a green GDP, but after it produced its first report, its efforts were shut down through funding losses, and the organization was eventually forbidden from pursuing any activity related to green GDP accounting.

“The rest of the world — the U.N. and several other of our peer OECD (Organization for Economic Cooperation and Development) countries — have gone on and developed, through a global consultation and 15 to 20 years, a system of environmental accounts that is being implemented in many of our OECD peer countries. So we are behind. That is not good for American businesses.”

Haney and Heun said without green GDP accounting, American businesses are at a disadvantage when it comes to making all types of decisions, such as what material to use in developing a new product.

“At this moment you cannot query the national accounts and figure out how we are doing with regard to the feedstock of a bunch of different materials,” Heun said. “Do we have a lot left or a little left? Are we expecting to see shortages or not in the future? You would need that information if you want to make good and wise decisions for your business. Our plea is, could we please start doing this kind of accounting so people could make wise decisions.”

The book includes suggestions for more technical formulas the authors said could be used to better equip scientists and policymakers in their decision-making.

The three argue the BEA needs to be encouraged to resume work on creating a green GDP. They also call for the centralization of data and valuation related to natural resources and depletion.

“Right now we do have physical counts of a lot of natural resources,” Haney said. “We know how much pollution we are emitting. We know how many barrels of oil are in the ground. But once you try to put a value on them, you have to make some judgment calls or come up with a range of values. That isn’t done anywhere and this is something the BEA would need to do,” she said.

Haney, Heun and Carbajales-Dale will discuss their book at 3:30 p.m. Friday, Feb. 27, in the science building on the campus of Calvin College.

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