'Beyond GDP' accounting and climate change
Growing GDP might indicate strengthening economic fundamentals. Or it might suggest that we are heading for trouble.
Prof. Jacqueline McGlade
Ladies and gentlemen
We've known for some time that GDP has shortcomings. So let me be brief in setting out the key concerns — from an environmental perspective, at least — and then explain how we at the European Environment Agency are trying to go 'beyond GDP' and how this links with climate change.
Much criticism of GDP rests on the recognition that the amount of goods and services that our economies produce depends on various stocks of capital.
[SLIDE 2: THE FIVE CAPITALS]
That includes the man-made machinery and infrastructure that we construct. But it also includes other types of capital, such as human knowledge and skills, and social institutions and systems. And it includes natural capital too, both finite resources and the ecosystems that provide numerous renewable goods and services.
If an economy produces more and more each year, it suggests that the fundamentals underpinning that output — the physical and environmental capital, social institutions, human knowledge, and so on — are becoming ever more robust.
That makes sense. And if GDP just revealed pure income in the Hicksian sense — that is, the returns we generate without depleting the underlying capital — then we’d be right to celebrate steadily increasing GDP.
The trouble is, GDP isn't designed to provide such a measure.
GDP doesn't tell us what is happening with our stocks of capital. Activities that maximise production in the short term need not preserve the underlying assets. Indeed, focusing just on GDP actually creates incentives to deplete capital stocks because the returns are treated as income.
So growing GDP might indicate strengthening economic fundamentals. Or it might suggest that we are heading for trouble.
Decision-makers, firms and citizens all need better indicators
[SLIDE 3: OUR COMPASS IS FAULTY]
As Pavan Sukhdev has remarked: 'our compass is faulty'. Clearly, we need something more.
Decision-makers need the right indicators to ensure that policies and investments maximise wellbeing for current and future generations.
Equally, citizens need such information to empower them to hold their governments to account.
Ideally we will integrate changes in our natural capital into national accounts
When we talk about going 'beyond GDP', therefore, we're talking about creating measures that convey not just what we have produced in the last year but also the state of the capital that determines how much we can produce sustainably now and in the future.
Such measures would therefore include national output but also encompass:
- [SLIDE 4] the depreciation of our man-made, physical capital (leaving net national income)
- [SLIDE 5] the depletion of our sub-soil (non-renewable) assets
- [SLIDE 6] changes in our ecosystem capital
[SLIDE 7: 'TRUE NATIONAL INCOME']
The beauty of the ecosystems approach is that the services they provide underpin both economic and social well-being and so offer the potential to link the three pillars of sustainable development.
The first is already part of SNA, the second is quite easy, the third is hard
Integrating these three types of capital into national accounts presents varying challenges. The first couldn't be easier, since it's already part of the System of National Accounts and is used to create Net Domestic Product, that is, GDP less depreciation of physical capital.
The second is comparatively easy, in the sense that the depletion is often simple to monitor and quantify in physical terms and to value in financial terms (using market prices). This approach is a key element in the System of Economic and Environmental Accounting currently being revised under the auspices of the UN
The third — measuring and valuing changes in ecosystem capital — poses more difficulties, which partly explains why the area has been relatively neglected until now.
This clearly poses some conceptual and practical difficulties, relating to both physical and monetary measurement
We have two steps to deal with here, neither of them easy in conceptual or practical terms:
- first, quantifying in physical terms the degradation or improvement of ecosystem capital stocks;
- second, putting a monetary value on those changes.
Both steps present challenges. Conceptually, we need to make certain choices about what elements of ecosystems we want to measure and how to value them. Thereafter, we face practical questions because there's really no limit to the amount of effort and resources that could be dedicated to this process.
Clearly, we need to strike a balance between our desire for accurate, comprehensive indicators and the need to keep spending within sensible limits.
We have made significant progress in measuring physical changes
Beginning, then, with the first step — of quantifying ecosystem changes — we have made clear progress.
At EEA we have started by focusing on the land, where many of the most important changes are occurring.
The status of natural capital in an area of land — what we call the 'total ecological potential' to deliver goods and services —breaks down into six elements.
[SLIDE 8: SIX INDEXES FOR ECOSYSTEM HEALTH]
Specifically, these are measures of bio-carbon; water systems; land use; biodiversity; capacity to support healthy populations; and absorption of artificial inputs, notably chemicals.
[SLIDES 9, 10, 11: MAPS OF ECOSYSTEM CHANGES]
Using data ranging from satellite imagery to local monitoring to administrative statistics, we are able to construct maps depicting the situation in units of 1 km2 across Europe.
We see the first four elements (carbon, water, land use and biodiversity) and the interactions between them as the core priority areas for quantifying natural capital and it's our plan to have Europe-wide data available within two years.
[SLIDE 12: PRIORITIES FOR FAST TRACK IMPLEMENTATION]
Carbon accounts and complementary indicators, such as sectoral NAMEA data, are relevant to climate change mitigation
Of course, this will be somewhat rudimentary in some areas initially but we believe it will provide us a solid platform to build on over coming years.
Moreover, even in simple form, such data could provide valuable input into discussions on key European policies — the CAP and the Water Framework Directive to name two.
And naturally, in the current context, we are particularly interested in how these indicators can help us address climate change.
[SLIDE 13: ECOSYTEM ACCOUNTS HIGHLIGHT THE STATUS OF BIOCARBON]
One obvious aspect related to climate change mitigation is quantifying ecosystem sequestration and storage of carbon. Here the bio-carbon accounts provide interesting data, highlighting what is really happening to our stocks of bio-carbon, where the risks and opportunities lie, and where we need to invest.
Moreover, these can be complemented with analysis of greenhouse gases emissions from particular economic sectors to provide a more complete understanding of how our land use and activities are influencing CO2 output. We are cooperating with Eurostat to assure such links.
[SLIDE 14: AND THE ECOSYSTEM HEALTH: CRUCIAL FOR RESILIENCE AND ADAPTATION]
But Beyond GDP accounts also measure ecosystem health, which is crucial for adaptation and resilience
But perhaps more important than the climate change mitigation perspective, 'beyond GDP' accounting provide a broader picture of ecosystem health, which is central to our resilience and adaptation to climate change impacts.
Increasing evidence shows that healthy ecosystems can significantly mitigate climate change impacts and help human societies adapt. Biodiversity and ecosystems provide shade, fresh air and water; reduce wind speed, erosion and water flow; regulate the nitrogen and carbon cycles; and provide a genetic resource for environmental adaptation.
In short, biodiversity and ecosystem health more broadly are crucial for resilience and adaption.
Physical indicators are very useful but monetary valuation will allow integration into national accounts
So, in physical terms, we are generating some very interesting indicators targeting bio-carbon specifically and ecosystem health more broadly. And by mapping these at fine scales, we are creating information relevant to citizens, organisations and decision-makers at all scales, from local to continental, and eventually up to the global.
Such indicators can be lined up next to GDP, allowing us to compare trends in production against capital assets. But they are obviously not directly commensurable. It's not clear what it would cost to restore depleted ecosystems or how much the damage will undermine future production.
[SLIDE 15: MONEY TREE]
Moreover, from a communication perspective, creating satellite or parallel sets of indicators has disadvantages. Essentially, GDP will continue to be perceived as the core measure of economic progress, while environmental and social measures remain peripheral (even if summarised in aggregated indicators).
Accordingly, it's only by communicating in the same language as national accounts that environmental and social perspectives can win the same status.
Putting monetary values on ecosystem capital changes is challenging and requires different methods at the macro level
[SLIDE 16: 'TRUE NATIONAL INCOME']
The ideal, therefore, is to translate our physical measures of changes in ecosystem capital into monetary form. Then, as explained earlier, they can be summed with our data on the depreciation of physical and sub-soil assets to provide information on our 'true national income'.
Clearly, estimating the financial value of natural capital is not easy. At the project level it is customarily done by calculating the Net Present Value of future benefits deriving from the asset. Experience suggests, however, that this approach is not practical at broader scales.
We therefore plan to estimate degradation by looking at the cost of restoring the ecosystem so that it can provide goods and services as previously. Many European policies embed cost recovery in their objectives – water, protected areas, environmental liability. So there is strong potential for this approach to be policy relevant.
Again, this is a challenging process and we are at the early stages. But it's worth remembering that the System of National Accounts started, in 1953, with a manual totalling just 56 pages and is now over 13 times longer. With the right commitment I see no reason why we can't make substantial progress in the next five years.
In many cases, existing laws provide for extensive collection of physical and financial data. The key will be to target or re-engineer them to support the ecosystem perspective and help us go beyond GDP.
So to sum up, the beyond GDP process provides a crucial backdrop for improving data provision through existing policy processes.
We have workable methods and we are making significant progress in preparing simple but robust physical accounts for ecosystems and we'll be working hard on getting those finalised in the next two years. At the same time, we'll also be focusing on refining a methodology for quantifying those physical changes in monetary terms.
The challenges are certainly considerable but if we can get this right we'll be in a position to develop some extremely valuable tools — capable of correcting many of the flaws of GDP and guiding successful and sustainable management of our economies and societies through careful stewardship of our ecosystems.
[SLIDE 17: THANK YOU]
For references, please go to www.eea.europa.eu/soer or scan the QR code.
This briefing is part of the EEA's report The European Environment - State and Outlook 2015. The EEA is an official agency of the EU, tasked with providing information on Europe’s environment.
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