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Green GDP: “Seeing” the Hidden Economy of Nature James Boyd Resources for the Future Washington, DC

Ecological Production Theory

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Page 1: Ecological Production Theory

Green GDP: “Seeing” the Hidden Economy of Nature

James Boyd

Resources for the Future

Washington, DC

Page 2: Ecological Production Theory

Ecological Wealth

• Public goods

– Shared, usually not owned

– “Free,” not things we pay for

• As economically important as market goods and services

– Difficult to track because not a part of market system

Page 3: Ecological Production Theory

Motivations for Green GDP

• Economic • Ecosystem goods and services are valuable and should

be measured to foster management and accountability

• Ecological • A way to highlight conditions, trends, depletion

• Philosophical • Calls attention to broader, more accurate measures of

wellbeing

Page 4: Ecological Production Theory

Carbon storage

Open space Habitat

Groundwater

Flood risk reduction

Air quality

Productive soil

Food

Page 5: Ecological Production Theory

Thank You

Open space

Food

Drinking water

Navigation

Habitat

Irrigation

Page 6: Ecological Production Theory

Open space Water quality

Beauty

Reduced energy needs

Air quality

Page 7: Ecological Production Theory

What Is GDP?

• Counts what we produce and consume

• Tracks those changes over time

• Weights “goods” by their “value”

– Sort of

• When we produce more, GDP

• When we produce more valuable stuff, GDP

Page 8: Ecological Production Theory

The Problem: GDP is Wrong Because It is Incomplete

• GDP always gets “better”

– the more coal we burn

– the more land we develop

– the more fish taken from the oceans

• Impact on ecological goods and services not measured

Page 9: Ecological Production Theory

The Broader Background

• Even without climate change

• Trends in global economic development

Page 10: Ecological Production Theory

Our Human Appetites

6.8 billion to 9.4 billion in mid-2050

Page 11: Ecological Production Theory

So Should We Replace GDP?

Page 12: Ecological Production Theory

Our Existing Economic Accounts

• Are a social miracle – Permit aggregation & disaggregation of a

complex system

– Objective, rule-driven and scientific

– Politically, institutionally independent

A powerful accountability

mechanism

Our culture pays attention, and it

should

Page 13: Ecological Production Theory

The Goal

• Construct a non-market, ecological equivalent to GDP

Page 14: Ecological Production Theory

Several Alternatives

• Macro-adjustments – Discount costs from existing measures

• Health, cleanup, regulatory costs

• Macro “near market” accounts – National timber, water, mineral accounts

• Wellbeing measures

• Material accounts

• Ecosystem good and services accounts, relying on ecological production theory

Page 15: Ecological Production Theory

Different Strategies #1

• Lump “adjustments” or “subtractions” to GDP – Estimate environmental health, remediation costs

• Pros – Relatively easy, gets you a number

• Cons – Doesn’t foster measurement infrastructure – Not an accounting system – Narrows scope of what is measured, not really

“ecological”

CHINA – Loss caused by pollution was $66.3B, a 3.05% reduction in GDP

Page 16: Ecological Production Theory

Different Strategies #2

• Wellbeing Measures

– Bhutan’s Gross National Happiness

– Genuine Progress Indicator

– Sarkozy’s quality of life measures

– Britain’s happiness census

• These are not “economic accounts”

– Not that there is anything wrong with that

Page 17: Ecological Production Theory

GDP-type Accounts

• Do not measure wellbeing

• They simply measure

– Amounts of stuff produced and consumed

– Weighted by prices

• Production, not the effect of production on human wellbeing

Page 18: Ecological Production Theory

Threshold Question

• How do we measure ecological wealth in terms of quantities?

– What are countable ecosystem goods and services?

Page 19: Ecological Production Theory

The Index Problem

• Factor 2 core elements – Quantity and price (value) indices

• Challenge – Consistently define and differentiate q’s and p’s

– Values are totally contingent on the definition of q

19

Q × P

Page 20: Ecological Production Theory

Commodities Are Not Immediately Obvious

• Public goods, so market doesn’t define q

– No sales receipts, units, inventory data, etc

• Too many alternative commodities

– Any natural feature or quality?

Page 21: Ecological Production Theory

Quantities – Market vs. Public Goods

Obvious Not obvious

Page 22: Ecological Production Theory

“Ecosystem Goods & Services”

• Examples

– Flood avoidance – an expected damage reduction

– Reduced water pollution – a quality

– Greater fish, bird abundance – a quantity

– Water availability – a quantity

– Open space – a quantity

These are measurable commodities q

Page 23: Ecological Production Theory

“Ecosystem Services”

• Vague & used in many different ways

– “Nutrient cycling” – a biophysical process, not a quantity q

– “Recreation” – a beneficial activity relying on natural inputs, not an ecological quantity q

Page 24: Ecological Production Theory

What is q?

• Simple production function

– Final economic good F

– Two inputs, capital K and ecosystem good E

– Production function F= F(K,E)

– PF, PK, and virtual PE

24

Page 25: Ecological Production Theory

What is q?

• We have a choice – q = E

• The ecological input

• “acres of open space,” “fish abundance”

– q = F(K,E) • Change in production of final good

• “increased crop yields,”

• Definition of p conditional on definition of q

25

Page 26: Ecological Production Theory

Practical Preference for q = E

• Want quantity index to reflect ecological output changes – Other definition can obscure ecological change

• If observe increase in F(K,E) • Is E improving or is K improving?

• Concrete ecological measures – A “units link” to natural science

26

Page 27: Ecological Production Theory

Basic Accounting Rules

• How to deal with double counting?

– Distinguish between final and intermediate goods

• Many ecological commodities are dual

– Both output and input to subsequent ecological process

• Ecological production theory is necessary to sort out these issues

27

Page 28: Ecological Production Theory

GDP Counts Only Final Goods

• Why?

– To avoid “double counting”

• Final goods include the value of inputs

• If you count both final and intermediate goods, you double count the value of the intermediate good

Page 29: Ecological Production Theory

Ecological Production Theory

• Distinguish inputs, processes, outputs

• Focus on ecological final goods, rather than inputs

• What are ecological final goods?

– Commodities “directly consumed, used, or enjoyed”

– Perception and experience is a test

29

Page 30: Ecological Production Theory

Examples

Input Biophysical Process Final Ecological Good

Surface water pH Habitat and toxicity effects

Fish, bird abundance

Acres of habitat Forage, reproduction, migration

Species abundance

Wetland acres Hydrologic processes Reductions in flood severity

Urban forest acres Shading and sequestration

Air quality and temperature

Vegetated riparian border

Erosion processes Sediment loadings to reservoirs

Page 31: Ecological Production Theory

Systems depicted as inputs and outputs, linked by biophysical processes/functions

Page 32: Ecological Production Theory

Definition of q

• Common resource/ecological units tend to be

– Bundled

• Forests, water volumes, species abundance, beaches are bundles of commodities

– Dual

• Often both final and intermediate commodities

Big implications for accounting

Page 33: Ecological Production Theory

Dual Commodities

• Many ecological commodities are both input and output

• In production theory, a given commodity can be both input and output

– Cars: output, but input when rented

Page 34: Ecological Production Theory

Dual commodity Process 1 output is Process 2 input

Page 35: Ecological Production Theory

Examples

Final & Intermediate Biophysical Process Final

Trout abundance Forage and predation

relationships Bird abundance

Forest acres Hydrological processes Species abundance

Wetland acres Hydrologic processes Flood pulse regulation

Page 36: Ecological Production Theory

Location & Timing Matter

Value of ecosystem goods

and services depends on

(1) Where they are

“how many

customers?”

“how many

substitutes?”

(1) When they’re delivered

Quantities need to be

space, time specific

Page 37: Ecological Production Theory

Assets vs. Goods & Services

• Assets are aggregates, goods and services are not

• The index aspires to an eventual value (price) counterpart

• Aggregation will thwart valuation

– What is the value of “national water volumes”?

– What is the value of “national open space acreage”?

37

Page 38: Ecological Production Theory

Decompose Bundles

Matters to final uses:

Navigation, irrigation, recreation

Matters to role as input to other biophysical processes and outputs:

Species abundance, vegetation

“Acre feet of freshwater”

Prefer to decompose commodity into

The hydrograph

Depth

Width

Velocity

Timing

Page 39: Ecological Production Theory

Carbon storage

Open space Habitat

Groundwater

Flood risk reduction

Air quality

Productive soil

Food

Page 40: Ecological Production Theory

A range of “products” Different quantities Different user groups Different values/weights

Page 41: Ecological Production Theory

The Geographic Boundaries of Accounts

• Do we only care about ecological conditions inside our own borders?

• Maybe, but

– Note effect of US consumption on ecological conditions in China

– Ecological conditions in China affect US supply chain

– Some ecological conditions have global effects

Page 42: Ecological Production Theory

Optimism

• 80 years ago, nobody could measure GDP

either

• How did GDP begin? A useful reminder…

Page 43: Ecological Production Theory

How many boxcars moving

between Chicago and NYC?

Page 44: Ecological Production Theory

Today

• Our accounting for the natural economy is

as crude as “boxcars”

• But international efforts, experiments are

underway

Page 45: Ecological Production Theory

Valuation (Weighting) Issues

• Existing valuations are inconsistent and questionable for accounting use – Commodities often not reported, let alone clearly

defined

• Environmental valuation meta-analyses – “Goods not commensurate”

• Reasons to question “benefit transfers” – Values location-specific (not fungible spatially)

– Values not based on clear commodity definition

Page 46: Ecological Production Theory

The U.S. Political Problem

• 1992, BEA begins work on environmental

satellite accounts

• 1995, Congress prohibits BEA from

conducting this work

• For budgetary perspective

• 2010 census, $11B

• Green accounts, $0

Page 47: Ecological Production Theory

Hi James -

Unfortunately, Congress has prohibited us from spending any funds on developing any measures of green GDP, so we are not working at all on this topic.

Thanks for sending the paper, though.

Page 48: Ecological Production Theory

Recommendations

• Focus on quantity definition via collaboration between natural and social scientists

• Aspire to accounts, not just indicators • Bureaucratic independence • Consider global accounting perspective • Satellites and experiments, not new NIPAs

yet • Investment > 0

Page 49: Ecological Production Theory

• “Counting Non-Market, Ecological Public Goods: The Elements of a Welfare Significant Ecological Quantity Index,” International Economic Association Series, Palgrave Macmillan, forthcoming.

• “The Definition and Choice of Environmental Commodities for Nonmarket Valuation,” Resources for the Future Research Paper 09-35, with Alan Krupnick, 2009.

• “What are Ecosystem Services?” Ecological Economics, with Spencer Banzhaf, 2007.

• “The Architecture and Measurement of an Ecosystem Services Index,” with Spencer Banzhaf, Resources for the Future Discussion Paper 05-22, September 2005.

• “The Nonmarket Benefits of Nature: What Should Be Counted in Green GDP?” Ecological Economics, 2006.

• “Box Cars and Breadlines Are No Way to Measure an Economy: A Plea for Environmental Accounts,” Resources for the Future Policy Commentary, January 19, 2009.

• “Location, Location, Location: The Geography of Ecosystem Services,” Resources, Fall 2008.

• “Don’t Measure, Don’t Manage: GDP and the Missing Economy of Nature,” RFF Issue Brief, May 2008.