Gross Domestic Pollution?

Last month, China has released a report announcing the results of a joint study by the State Environmental Protection Administration and the National Bureau of Statistics to conduct a "Green GDP accounting" and monetize the cost of pollution to the Chinese economy in 2004 [See press release here]. According to the report, some US$64 billion of damage was incurred by environmental pollution and ecological damage, amounting to some 3% of its US$2 trillion economy.

From the Wall Stree Journal ("Why Beijing is Trying to Tally the Hidden Costs of Pollution"; October 2, 2006, page A2):

"Green GDP is one part of the budding field of environmental economics, which aims to apply rigorous business-accounting methods to environmental problems. "Green economists" are driven by the notion that typical methods of measuring growth -- namely GDP -- are too crude a way to measure the overall health of an economy...While GDP looks at the market value of goods and service produced in a country each year, it ignores the fact that a nation might be fueling its expansion by polluting or burning through natural resources in an unsustainable way. In fact, the usual methods of calculating GDP make destroying the environment look good for the economy. If an industry pollutes in the process of manufacturing products, and the government pays to clean up the mess, both activities add to GDP. China's report estimates it would take a one-time direct investment of about $136 billion -- nearly 7% of GDP -- to clean up all the pollution pumped into the nation's air, water and soil in 2004."

Another take of the limits of GDP (or GNP, a slightly different notion) can be summed up in the words of former U.S. Senator Roberty Kennedy:

"The gross national product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and nuclear warheads... it does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials. It measures everything, in short, except that which makes life worthwhile."

[For an excellent review of further criticisms on the way GDP/GNP is calculated, see Wikipedia's entry for "Gross domestic product"]

While the concept of a green GDP is not new, what is groundbreaking is a government's official announcement and calculation of such figures, and even more surprising is that it is China, for so long a target of environmetnalists' ire, is the first government to do so. (For a great article on the environmental paradox that is China, read this post titled "A Tale of Two Chinas" from Joel Makower. Sidebar: I query whether it really a paradox rather than a case of "drastic sitruations calls for drastic measures" which results in China having the most challenging of environmental problems on the one hand, and having the most progressive of environmental policies on the other hand, with the latter being a rational reponse to the former.)

Due to the limitations of data availibitlity, the China study was limited in that only "environmental pollution" and "ecological damage" costs were factored in. Ideally, according to Beijing officials, five types of natural resource use costs (minerals, forest, water and fishery resources) should also be accounted for. Furthermore, only 10 of 20 submetics under "environmental pollution" were included in the study. This suggests that the $64 billion figure is clearly an underestimate.

In any case, this Green GDP accounting is a landmark study which may catalyze an revolution in the way economists measure economc growth. Let's hope this is not a one-time study, and that green GDP accounting will be eventually integrated into the mainstream.