Turning green GDP on its head

Calculating green GDP is a complex business which few can agree upon, according to renowned economist Ma Zhong. More practical, he argues, is a system that makes organisations and businesses account for environmental costs during production – before, not after environmental losses occur.

China’s prolific economic growth has come at considerable cost to her environment. More than 80% of the country’s rivers are so heavily polluted they no longer support fish, and research institutions, including the World Bank, are busily attempting to place an economic value on the damage which some claim runs into tens or even hundreds of billions of yuan (1 billion yuan = US $125 million).

Some damage estimates have, without doubt, come as a surprise, but their underlying message – that China’s environmental crisis is serious – has not been denied and interest in green GDP accounting – a system to calculate GDP that subtracts a value for environmental cost – is on the rise.

For environmentalists the benefits of green GDP are obvious: a potentially powerful mechanism for environmental protection. Current accounting methods, they say, treat the environment as expendable whereas green GDP, if adopted, could begin to reverse the effects of environmental degradation.

Economists and statisticians – to whom GDP figures are bread and butter – see the significance of green GDP more from a scientific perspective: the accuracy of data, to them, is paramount. Together, however, their mixed interests have led to growing calls for the implementation of green GDP accounting.

The alliance, however, has yet to resolve basic issues that prevent the concept of green GDP from becoming reality. Specific concerns over how exactly to calculate environmental losses have yet to be resolved.

Time is one critical factor in the equation since environmental degradation is often a slow process that takes places over a long period – decades, centuries or even longer. Unusually severe dust storms that hit areas of northern China in April were, for example, were caused by changes in agricultural practices over the course of many years. Lung cancer can also be caused by extended periods of exposure to polluted air. Damages, therefore, would need to be spread over a number of years in the same way that an accountant writes-off an asset. But over how many years and at what value?

Estimations of environmental loss in terms of hard currency can also vary considerably because, unlike the conventional marketplace, there is no clear relationship between supply and demand of public resources over which there is little ownership. At present, calculating the value of environmental loss with any degree of accuracy is almost impossible.

Disagreements over methodology suggest that the hope of realising the goal of environmental protection through establishing green GDP is unworkable. However, this should not become a justification for abandoning green GDP altogether.

Opportunities, for example, do exist to use conventional GDP figures as a means to analyse, evaluate and improve upon the cleanliness of economic growth. Recent work by the national statistical bureau found that richer, eastern provinces – where growth has been fuelled by heavy industry – have begun to restructure their economies in favour of cleaner, service industries. Poorer western provinces, however, are still in the process of heavy industrialisation and pollution levels there are set to rise.

The current Five-Year Plan – the 11th, which runs from 2006–2011 – also shows encouraging signs. Environmental targets, many of which have been missed during the past – emissions of sulphur dioxide exceeded the target set in the 10th Five Year Plan (2001-2005) by almost 40% – have now been integrated with economic targets. The hope is that China’s success in achieving targets for economic growth over the past twenty years can now help with environmental protection, in particular energy efficiency. One of these newly conceived indicators reduces, by 20%, the amount of energy consumed to generate one unit of GDP. Another reduces the amount of pollutant discharge from work units in relation to GDP by 10%.

In this way at least some environmental costs are accounted for during production – before, not after environmental losses occur – and will naturally make GDP calculations much greener without the need to assess environmental loss, which is far less easy. If government, manufacturers and ordinary citizens continue to recognise environmental protection as part of the everyday costs of economic production this paves the way for setting more ambitious targets and increasing environmental protection.

The author: Zhong Ma is a professor of economics and president of the Institute of Environmental Studies at Renmin University in Beijing, his research includes environmental economics, wetland biodiversity and national population. He sits on various national-level steering committees including the Ministry of Education’s Environmental Studies Education Department and the editorial boards of China Environmental Science, Journal of Natural Resources and Wetland Science.