The economy is one of the “three pillars” (alongside human development and the environment) by which the aim of sustainable development should be pursued. However, the method of measuring national economies is widely acknowledged to be unfit for purpose.
Gross domestic product (GDP) is calculated as the value of goods and services produced within a country, without adjustment for any change in environmental assets or citizens’ well-being.
The more damaging the economic activity, the more perverse are the results. For example, the construction of a new airport has a positive effect on GDP. Climate change, noise and air pollution, loss of habitat and the increase in inequality (airports benefit people who can afford to fly) are all excluded from the calculations.
Yet GDP is universally regarded as the most important of all economic indicators. The phrase “economic growth” has unequivocally positive connotations, elevating policies which favour the present at the expense of the future.
The same forces are at play within individual corporations. Their balance sheets do not present the “true and fair view” so prized by accountants because they do not internalize social and environmental costs. Shareholders also opt for short term strategies because there is no accounting for the long term damage to the planet.
“Environmental costs” refer to the depletion of the earth’s natural capital – ecosystems, biodiversity and mineral resources – and the damage caused by waste pollution.
Social costs of producing goods and services include any effects on health, employment opportunities and inequality. Attempts to explain the outcome of the 2016 US presidential election have focused on reports of citizens feeling worse off, despite experiencing strong economic growth. This may illustrate the failure of GDP to identify that only the richest minority are benefiting from growth.
The incompatibility between sustainable development and GDP was recognised in the set of Rio Principles for stabilising the environment drawn up at the UN Conference on Environment and Development in 1992. Principle 16 states:
National authorities should endeavour to promote the internalization of environmental costs
The cumulative effect of more than 25 years of failure to heed this message is alarming. If every country adopted a US lifestyle, the resources of five planet earths would be necessary.
Whilst there is broad acceptance that a green formula for GDP is fundamental to sustainable development, there is no consensus on how green economics might function.
The process of greening a traditional economic model is already familiar. Measures such as the transition to renewable energy and recycling waste are increasingly linked to positive social benefits through net gains in employment. But such measures do not directly tackle the shortcomings of national and corporate accounting.
To advance this challenge, the UN Environment Programme sponsored The Economics of Ecosystems and Biodiversity, a series of reports which estimate a monetary value for each of about 30 ecosystem services, including air quality, pollination and carbon sequestration. Such valuations could potentially feed into national accounting, as well as informing decisions on tax, subsidies and major infrastructure projects.
Influential supporters of this approach, such as the OECD and World Bank, go further and enthuse about prospects of “green growth”, anxious perhaps to satisfy the human addiction to ever-rising standards of living. But many scientists are sceptical that it can ever be possible to decouple economic growth from depletion of environmental resources. They observe that valuation of ecosystem services cannot take account of the risks of species extinction or outright collapse of the system.
The world’s poorest countries are also reluctant to endorse radical reform to GDP, unsure of its relevance to their own priority to bridge the global divide between rich and poor nations. They are wary of being encouraged to leapfrog traditional industrialization and become role models for the uncertain territory of green economics.
Although there is genuine interest in supplementing GDP accounting with new indicators of social and environmental well-being, the traditional GDP paradigm remains intact. Agenda 2030 for Sustainable Development taking effect from 2016 is silent on the subject of green economics.