Ecological Economics and the GDP

Maggie Winslow, Ph.D.

http://www.bea.gov/national/pdf/dpga.pdf National Income and Product Accounts (NIPA) tables

GDP = Consumption +

Investment +

Government Spending +

Net Exports

Y = C + I + G + NX

Firms Households

$

Goods and Services

Labor

$Environment

Classic Diagram Explaining GDP

Savings/Investment

Taxes/ Government Spending

Imports/Exports

Savings/Investment

Taxes/ Government Spending

Imports/Exports

Firms Households

$

Goods and Services

Labor

$Ecosystem

Classic Diagram Explaining GDP

Savings/InvestmentTaxes/ Government SpendingImports/Exports

Savings/InvestmentTaxes/ Government SpendingImports/Exports

Diagram from Ecological Economics

Ecosystem

matterenergy

matterenergy

recycling

heat

Economy

ThroughputThroughput

GD

PG

DP

Raw MaterialsRaw MaterialsWasteWaste

Goods and Services

Goods and Services

Resource Resource Degradation/Degradation/

PollutionPollution

ThroughputThroughput

The faster the throughput, the faster the depletion and degradation and the more “lost

opportunity.”

Resource DepletionResource Depletion

Limits to Growth

Ecosystem’s capacity to 1. Regenerate renewable resources2. Restore ecosystem services

Technological capacity to3. Recycle and/or substitute non-renewable resources

1. Within the regenerative and 2. Re-absorptive capacity of the environment and 3. Within our capacity to recycle or replace non-

renewables.

If we are using resources faster then this, we are drawing down natural capital.

It isn’t income, it is capital spending.

Throughput has to be:

• Renewable resources• Non-renewable resources• Ecosystem services

Can't man-made capital make up for natural capital?

Constraints:•Lack of technical knowledge•Thermodynamic (energy) limits

Natural Capital is Valuable

The value delivered by the biosphere is estimated to be in the range of US$33 trillion per year (1997).

Global economy delivers US$18 trillion per year. -The value of the world’s ecosystem services and natural capital. NATURE, VOL 387, 15 MAY 1997

Urban forests in Tennessee provide an estimated:

•$204 million per year in pollution removal•$66 million per year in energy savings

http://worldlandscapearchitect.com/tennessees-urban-forests-valued-in-the-billions-2/#.T2p8osrN6dM

Annual cost of global forest loss: $2 - $5 trillionhttp://news.bbc.co.uk/2/hi/science/nature/7662565.stm

Solutions?

Recognize the Value of Natural Capital • TEEB – The Economics of Ecosystems and

Biodiversity www.teebweb.org• WAVES – Wealth Accounting and the Valuation of

Ecosystem Services www.wavespartnership.org

Incorporate this Value into national measures of income.

Easier said than done…

Create Alternative Indicators

• Add to existing GDP – example, add depreciation of natural capital.

• Enlarge GDP to include more information:• Index of Sustainable Economic Welfare• Genuine Progress Indicator

• Use additional indicators to support GDP• Environmental indicators• Social indicators

Y= C+I+G+NXIncome (Y, GDP) = consumption

+ investment+ government

spending+ net exports

Y= C+I+G+NX Consumption

• Cg - Consumption of non-durable goods and energy-intensive services

• Cs - Consumption of human-capital intensive services

• Cm - Household investment in consumer durables.

We need to limit Cg but can let the others grow.

Y= C+I+G+NX Investment

• Ime - Investment in energy-intensive manufactured capital

• Imc - Investment in energy-conserving manufactured capital

• In - Investment in natural capital

• Ih - Investment in human capital

Here we need to limit Ime.

Y= C+I+G+NX Government Spending

• Gg - Non-durable goods and energy-intensive services

• Gs - Human capital-intensive services

• Gme - Investment in energy-intensive manufactured capital

• Gmc - Investment in energy-conserving manufactured capital

• Gn - Investment in natural capital

• Gh - Investment in human capital

Here we need to limit Gg and Gme.

Human Capital EconomicProduction

Process

GoodsandServices

EvolvingCulturalNorms andPolicy

Well Being(Individual andCommunity)

Consumption(based on changing,adapting preferences)

Education, training,research.

Building

Investment(decisions about, taxescommunity spending,education, science andtechnology policy, etc., basedon complex propertyrights regimes)

Individual Public

GDP

Wastes

Common

Ecologicalservices/amenities

having, being

- having,- being

negative impacts on all forms of capital

being, doing, relating

Restoration,

ConservationNatural Capital

ManufacturedCapital

having

positive impacts on human capital capacity

doing, relatingComplex propertyrights regimes

SolarEnergy

Social Capital

Lim

ited

Su

bst

ituta

bili

tyB

etw

ee

n C

ap

ital F

orm

s

Model of the Ecological Economic System

Waste heat

Institutionalrules, norms, etc.

Materially closed earth system

From: Costanza, R., J. C. Cumberland, H. E. Daly, R. Goodland, and R. Norgaard. 1997. An Introduction to Ecological Economics. St. Lucie Press, Boca Raton, 275 pp.