On 9 January 2019, the Green Economy Coalition, the Green Growth Knowledge Platform and the Partnership for Action on Green Economy held a High-Level Media Debate on the question, "What makes your country wealthy?" In the lead up to the event, we asked thought leaders to share their insight on new approaches to wealth accounting and the challenges of moving beyond GDP. Here we hear from Dr. Pushpam Kumar, Chief Environmental Economist, UN Environment and leading expert on the valuation and accounting of natural capital for green economy.
To know whether the economy is on the path of sustainability or not, it is important to know the base of the economy – produced capital, human capital, and natural capital. We must measure the changing health of these assets on a per capita basis, as change in wealth per capita is closely related to well-being and sustainability. This has been shown in both theory and practice, and is elaborated in the UN Environment Inclusive Wealth Report series.
I do not see any risk, so long as the decisions around how to value nature are made by professionals and not amateurs! Placing a value on nature and ecosystems services is complex, and the field is quickly evolving to do it better, for example, through e-learning resources, new spatial data technologies, and modelling software.
The psychological barrier is the most difficult barrier to get past. GDP has become a part of the world’s common vernacular, representing our ideas of wealth, progress, and a healthy economy. It is taught in entry-level economics courses as the standard by which to judge a nation’s and its peoples’ well-being.
Yet, GDP was never meant to measure progress and sustainability. In fact, Simon Kuznets, who pioneered our modern use of GDP, cautioned that it should not be used to measure well-being as its purpose is mainly to track income. Lately, many influential voices in the profession of economics like William Nordhaus, James Tobin, Ken Arrow, Jo Stiglitz and Partha Dasgupta also echoed the same. Even with this warning, however, it came to be the ultimate measure of economic development and human well-being. Altering that perception has proven to be difficult.
Moving beyond GDP would correct the radar of progress measurement. It would provide comprehensive information about the impact of our projects, policies, and planning on nature and human well-being, rather than just on cumulative monetary gain. In this way it encourages true efficiency in the economy. Policy based on wealth and not income would also help in more accurately tracking progress on global goals like the SDGs.
Many countries are now forging ahead and championing the cause of wealth measurement. India, for instance, began calculating and tracking some of its natural capital assets, mainly forest resources, over a decade ago. In 2013, the World Bank conducted a comprehensive assessment of the value of ecosystem services from various biomes across India. The country is also taking part in the UN’s Natural Capital Accounting Project, with a pilot study on ecosystem accounts in one of its states.
France is also a leader in this space. The country publishes annual Beyond GDP indicators, and is the founding donor of the Inter-American Development Bank’s Natural Capital Lab, which emphasises the importance of maintaining and enhancing the natural capital of Latin American and Caribbean countries.
France’s Energy Transition for Green Growth law (ETL) requires companies to report on how climate change will impact their business model, and requires investors to disclose the environmental impacts of their funds. Its Green Economy Committee has introduced several schemes to internalize negative externalities harming the environment and continues to normalize including the cost of environmental harm in prices.
In 2014, carbon was priced into the taxation of fossil fuels in France, with a built-in gradual price increase, and, in 2015, the French government participated in launching the Carbon Pricing Leadership Coalition.
China has also taken major steps towards better natural capital accounting and valuation over the past few decades. In 1997, Beijing assessed its Green GDP, which set out precedents for environmentally adjusted indicators throughout the country. Green GDP was calculated for the country on and off during the early 2000s - approximating how much environmental damage cost the country in terms of GDP percentage. In 1998, the Chinese National Bureau of Statistics began calculating environmental accounts and now tracks forestry, energy, pollution treatment, water, and minerals.
China has also experimented with new approaches to environmental management, including “eco-compensation” which are similar to payments for ecological services but encompass a wider range of policies and program types.
Finally, Canada has a Comprehensive Wealth Report similar to the Inclusive Wealth Report launched by UN Environment. It examines the country’s produced, natural, human, financial, and social capital.
In terms of companies, PUMA very comprehensively accounts for the impact of their activities on the environment. They produce a combined financial and sustainability report annually, and place a monetary value on the impact the company’s activities have on the environment – in 2016 the impact of PUMA’s operations and supply chain was €457 million.
I have been working on ecosystem accounting and valuation for decades, and have never seen a better time, nor more traction, for pushing forward the frontier on wealth measurement for sustainability. Governments, business, media, and civil society are making major efforts to make it happen; so that inclusive wealth becomes the basis of policy formulation, impact assessment, and finally macro-economic planning and resource allocation in the economy.
The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.