The greening of the accountants

Are we overestimating the value of production in Kazakhstan? 

Most countries regard the value of their production – “gross domestic product” – as the barometer of welfare.  When GDP per capita rises, the government crows of this alleged improvement in a resident’s well-being.

And it’s usually right.  Adjusted for price changes, GDP correlates with life expectancy, education, and the lack of corruption.  While GDP is often a consequence as well as a cause of such factors, most people want more of it.  They’d rather be rich than poor.

Even so, GDP as a barometer has a few cracks in the casing.  Sometimes it will rise although well-being falls.  In World War II, national spending of the belligerents increased, but so did their loss of life. 

The case that dominates headlines today is environmental policy.  When it comes to pollution, GDP is perverse.  Suppose that bronchitis, induced by Almaty’s infamous smog, lands you in the bol’nytsa for a weekend.  Your hospital bill is $300.  GDP will rise by $300, but you certainly are not better off than you would have been without the bronchitis.

The bucks shouldn’t stop here

In the last two or three decades, nongovernmental organizations like the World Resources Institute have estimated “green GDP” by subtracting environmental costs from conventional gross domestic product.  Green GDP has the salubrious effect of penalizing pollution.  If we made it a policy always to measure GDP in green terms, then a developing country seeking to join the ranks of the rich would have to consider whether some pollutant unduly threatened health despite creating a few jobs.

But measuring green GDP is not as clear-cut as it may look.  Let’s return to your case of bronchitis.  We know that the disease doesn’t raise your well-being by $300, so we should subtract at least this amount from GDP.  But the matter doesn’t end there:  We should also penalize production for creating the bronchitis in the first place.  At first, it may seem that we should subtract twice $300, or $600 in all, from GDP.  But that may not be correct.  We do observe that you were willing to pay $300 to avoid future bronchitis; but the cost of the bronchitis that you have already suffered may be less than, equal to, or more than $300.  All that we can say is that the initial subtraction of $300, which is all that some green GDP accountants do, is almost certainly an underestimate of pollution damages.     

A little too green

To make matters worse, sometimes green GDP goes too far.  In Central Asia, some published measures of green GDP assume that all environmental damages fall upon the polluting population. 

For some pollutants, that assumption would be reasonable. For example, when a factory dumps raw sewage into a stagnant creek, it creates algae and bacteria that consume the oxygen dissolved in the water, killing off fish and marine species.  The costs of this pollutant, called “biochemical oxygen demand” or BOD, fall mainly on the local fishermen and fish consumers; it is an example of a “local pollutant.” BOD would not have been so deadly had the creek been fast-moving, since this would have diluted the sewage. 

However, measures of green GDP in Kazakhstan emphasize not BOD but carbon emissions, which result from burning coal and oil in order to generate electricity.  The estimates of carbon damages are so large that they dominate the calculated gap between conventional and green GDP.  So these studies may conclude that a fine way to raise well-being in Kazakhstan is to stop burning fossil fuels.

That conclusion is dead wrong. 

Carbon emissions are the textbook example of a nonlocal pollutant, since their main effects occur far from the point of emission.  Being light, carbon gases rise to the top of the troposphere, where they disperse around the world.  The layer of carbon gases seals in the heat that was radiated by the surface of the Earth -- the “greenhouse effect.”  The atmosphere heats up, warming the surface.  Polar ice melts, and coasts flood.  The damages due to the carbon emissions are global, not local; they fall on Kazakhstan only to the extent that it is part of the world population. Thus, if D denotes the total environmental damages due to emission of a carbon ton, and if T is the number of tons emitted by Kazakhstan, then the local damages due to Kazakhstan’s carbon emissions is not TD, which is what the studies assume, but (crudely) aTD, where a is Kazakhstan’s share of the global population – a tiny fraction. 

For example, suppose that Kazakhstan emits one ton of carbon; that the total damages due to that ton (in themselves a trick to calculate) are estimated at $20.  Kazakhstan holds roughly two-thousandths of the world population, according to World Bank data. Then the resulting damages are Kazakhstanis are worth .002*1*$20 = $.04, or four cents.  The studies, however, would have estimated the damages as $20.

These studies have severely overestimated the impact of carbon emissions on Kazakhstani welfare.  Indeed, Kazakhstan has persisted in emitting carbon gases precisely because it does not incur most of the damages; they fall instead on the rest of the world.

Green GDP accountants are hoisted on their own petard.  Once officials in Astana understand that most carbon damages occur outside Kazakhstan, they may dismiss green GDP as inconsequential.  That would be a grievous error, because production in Kazakhstan does generate local pollutants. 

n        --- Leon Taylor tayloralmaty@gmail.com

n   

Notes

(1)  “Bol’nytsa” is Russian for “hospital.”

(2)  Of course, population is not the only determinant of global warming damages.  Others include income and geography.

(3)   Green GDP should also include the value of environmental services, such as the gorgeous mountain view rimming the south of Almaty.  For simplicity, I will concentrate here on pollution costs and depletion costs.

Good reading

Boyd, James.  The nonmarket benefits of nature:  What should be counted in green GDP?  Resources for the Future Discussion Paper 06-24.  May 2006. http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-06-24.pdf

John Houghton.  Global warming: The complete briefing.  Third edition.  Cambridge University Press.  2004.

Robert N. Stavins, editor.  Economics of the environment:  Selected readings.  Sixth edition.  New York:  W. W. Norton.  2012.

Tietenberg, Tom.  Environmental and natural resource economics.  Seventh edition.  Boston: Pearson Addison Wesley.  2006.    

World Bank.  World Development Indicators.  www.worldbank.org