The green gross domestic product (green GDP or GGDP) is an index of economic growth with the environmental consequences of that growth factored into a country's conventional GDP. Green GDP monetizes the loss of biodiversity, and accounts for costs caused by climate change. Some environmental experts prefer physical indicators (such as "waste per capita" or "carbon dioxide emissions per year"), which may be aggregated to indices such as the "Sustainable Development Index".

Calculation

Formula The environmental and related social costs to develop the economy are taken into consideration when calculating the green GDP, which can be expressed as:

Green GDP = GDP − Environmental Costs − Social Costs

where the environmental cost typically qualifies:

Depletion value of natural resources, e.g. oil, coal, natural gas, wood, and metals; Degradation cost of ecological environment, e.g. underground water pollution, topsoil erosion, and extinction of wildlife; Restoration cost of natural resources, e.g. waste recycling, wetland restoration, and afforestation;

and the social costs typically include:

Poverty caused by degradation of environment, e.g. shortage of natural resources after exploitation; Extra healthcare expenditure coming with the degradation of ecological environment;

Above calculations can also be applied to net domestic product (NDP), which deducts the depreciation of produced capital from GDP.

Valuation methodology Since the indicators of environment are generally expressed in national accounts, the conversion of the resource activity into a monetary value is necessary. A common procedure to evaluate, proposed by United Nations in its System of Integrated Environmental and Economic Accounting handbook, applies following steps: +No.SEEA Steps1Compilation of the supply and use accounts (GDP accounting)2Identification and compilation of environmental protection expenditures3Compilation of produced resource asset accounts4Compilation of physical resource accounts5Valuation of the resource: compiling the monetary accounts6Compilation of physical environmental accounts (non-economic assets)7Compilation of emissions by economic sector8Maintenance costing of environmental degradation If current values of resources are non-existent or non-explicit, the next option is to value the resource based upon the present value of expected net returns from future commercial use. That is, the sum of present values for future expected income minus expected future expenditures (the cash flow CF), for each future time point (t), is termed the net present value (NPV).

Rationale

The motivation for creating a green GDP originates from the inherent limitations of GDP as an indicator of economic performance and social progress. GDP assesses gross output alone, without identifying the wealth and assets that underlie output. GDP does not account for significant or permanent depletion, or replenishment, of these assets. Ultimately, GDP has no capacity to identify whether the level of income generated in a country is sustainable. Richard Stone, one of the creators of the original GDP index, suggested that, while "the three pillars on which an analysis of society ought to rest are studies of economic, socio-demographic, and environmental phenomenon", he had done little work in the area of environmental issues.Richard Stone, "The Accounts of Society", "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1984", 8 December 1984

Natural capital is poorly represented in GDP. Resources are not adequately considered as economic assets."Policy Recommendations" , "International Human Dimensions Programme on Global Environmental Change", 2012 Relative to their costs, companies and policymakers also do not give sufficient weight to the future benefits generated by restorative or protective environmental projects. As well, the important positive externalities that arise from forests, wetlands, and agriculture are unaccounted for, or otherwise hidden, because of practical difficulties around measuring and pricing these assets."Natural Capital Accounting", "Wealth Accounting and the Valuation of Ecosystem Services", 2013 Similarly, the impact that the depletion of natural resources or increases in pollution can and do have on the future productive capacity of a nation are unaccounted for in traditional GDP estimates.

The need for a more comprehensive macroeconomic indicator is consistent with the conception of sustainable development as a desirable phenomenon."Environmental Accounting for Sustainable Growth and Development with Special Reference to a System of Integrated Environmental and Economic Accounting (SEEA): The Indonesian Experience", "Statistical, Economic and Social Research and Training Centre for Islamic Countries" GDP is mistakenly appropriated as a primary indicator of well-being, and as a result, it is used heavily in the analysis of political and economic policy. Green GDP would arguably be a more accurate indicator or measure of societal well-being. Therefore, the integration of environmental statistics into national accounts, and by extension, the generation of a green GDP figure, would improve countries' abilities to manage their economies and resources.

History Many economists, scientists, and other scholars have theorized about adjusting macroeconomic indicators to account for environmental change. The idea was developed early on through the work of Nordhaus and Tobin (1972), Ahmad et al. (1989), Repetto et al. (1989), and Hartwick (1990).John Asafu-Adjaye, "Green National Accounting and the Measurement of Genuine (Extended) Saving" , United Nations Economic and Social Commission for Asia and the Pacific, 2004

In 1972, William Nordhaus and James Tobin introduced the first model to measure the annual real consumption of households, called the Measure of Economic Welfare (MEW).William Nordhaus and James Tobin, "Is Growth Obsolete?", National Bureau of Economic Research, 1972 MEW adjusts GDP to include the value of leisure time, unpaid work, and environmental damages. They also defined a sustainable MEW (MEW-S) value, and their work was the precursor to more sophisticated measures of sustainable development.

Repetto further explored the impact that the failure of resource-based economies to account for the depreciation of their natural capital could have, especially by distorting evaluations of macroeconomic relationships and performance.Jeroen van den Bergh, "Ecological Economics and Sustainable Development", 1996 He and his colleagues developed the concept of depreciation accounting, which factors environmental depreciation into "aggregate measures of economic performance".

In their seminal report, "Economic Accounting for Sustainable Development", Yusuf Ahmad, Salah El Serafy, and Ernst Lutz compiled papers from several UNEP-World Bank sponsored workshops, convened after 1983, on how to develop environmental accounting as a public policy tool.Edited by Yusuf J. Ahmad, Salah El Serafy and Ernst Lutz, "Environmental Accounting for Sustainable Development", The World Bank, 1989 The central theme of all of the authors' arguments is that the system of national accounts (SNA), as it traditionally calculates income, omits important aspects of economic development that ought to be included. One important disagreement on environmentally adjusted indicators is presented by Anne Harrison and Salah El Serafy, in their respective chapters. Harrison argues that appropriate adjustments ought to be made within the existing SNA framework, while El Serafy suggests a redefinition of what constitutes intermediate and final demand. In his view, the SNA should not consider the sale of natural capital as generating value added, while at least part of the income generated from this sale should be excluded from GDP and net product. This would effectively allow GDP to continue to be used extensively.

In "Natural Resources, National Accounting and Economic Depreciation", John Hartwick presents an accounting methodology to find NNP, inclusive of the depletion of natural resource stock, by representing the use of natural resources as "economic depreciation magnitudes".John Hartwick, "Natural Resources, National Accounting and Economic Depreciation", Queen's University, 1990

This method of accounting, which makes adjustments to the existing national account indicators, found traction in the System of Integrated Environmental and Economic Accounting (SEEA), published by the United Nations as an appendix to the 1993 SNA.Joy Hecht, "The Evolving System of Integrated Economic and Environmental Accounts", Encyclopedia of Life Support Systems, 2004 The report offered five approaches, or versions, to developing environmental accounts. Over the years, the SEEA has been expanded and revised in view of the increased sophistication of accounting methodologies and technology. This revision will be explored in greater detail in the "Global Initiatives" section. Ultimately, the importance of the SEEA with respect to the green GDP is that it is possible to create full-sequence accounts from which aggregates, such as green GDP, can be derived and compared internationally, and many countries have begun this process.London Group on Environmental Accounting, "Why We Need the SEEA", Beyond GDP, 25 October 2007

Several reports and initiatives after the SEEA-1993 have explored the possibility of expanding or changing the scope of environmentally-adjusted macroeconomic indicators. As the popularity of green GDP and other environmentally adjusted macroeconomic indicators grows, their construction will increasingly draw on this continuously developing body of research, especially with respect to the methodology associated with valuing non-market capital (e.g., services from natural capital which exist outside of traditional market settings).

In 1993, the Bureau of Economic Analysis, the official bookkeeper of the U.S. economy, began responding to concerns that the GDP needed retooling. The agency began working on a green accounting system called Integrated Environmental and Economic Accounts. These initial results, released in 1994, showed that GDP numbers were overstating the impact of mining companies to the nation's economic wealth. Mining companies did not like those results, and in 1995, Alan B. Mollohan, a Democratic House Representative from West Virginia's coal country, sponsored an amendment to the 1995 Appropriations Bill that stopped the Bureau of Economic Analysis from working on revising the GDP.Stiglitz, Joseph (2008), presentation in New York, 5 Feb 2008, "video from 3:18"

Costanza et al. (1997) estimated the current economic value of 17 ecosystem services for 16 biomes.Costanza et al., "The Value of the World's Ecosystem Services and Natural Capital", Nature, 1997 The value of the entire biosphere, most of which exists outside of the market, is estimated conservatively to be between $16–54 trillion per year. By comparison, global GNP is approximately $18 trillion per year. The size of this figure demonstrates the significance of ecosystem services on human welfare and income generation, and the importance of identifying and recognizing this value. The valuation techniques used by the authors were often based on estimations of individuals' "willingness-to-pay" for ecosystem services.