To understand the total volume of a country’s economy at any period in time, we must look at its Gross Domestic Product (GDP). There are two main ways to calculate this: one can measure the country’s total revenue, in salaries, profits, interests and so on. Or one can measure the country’s expenditure: spending on consumer goods, investments, net export etc. These two numbers, of total revenue and expenditure, should be the same. GDP can express a country’s total economic output and its national income level quite accurately.
GDP is, at present, the accounting system for China’s national economy. In fact, every country in the world has adopted GDP as their accounting system, and it has become the standard for measuring the development level of a country.
But, as they say, there’s no such thing as a “free lunch.” Increases in a country’s total economic output will certainly mean an increase in the consumption of natural resources; pollution and environmental damage will also increase. GDP statistics only show the total economic revenue or output, and do not show environmental costs. There is no number that can quickly help us ascertain the ecological situation in a country. But the environment is an integral part of a country’s economy.
In the absence of ecological factors, a GDP figure cannot give a comprehensive picture of a nation’s economic situation. The numbers may even look ridiculous, since environmental pollution may in fact cause an increase in GDP. For example, in the case of a flood, a dam has to be constructed to prevent it. This will lead to an increase in investments and salaries, and therefore an increase in GDP. This is also true where pollution makes people ill; despite the obvious pain and loss, the increase in patients will lead to growth in the medical industry – and increase GDP.
In the past 20 years, China’s economic growth has been the fastest in the world. But how to calculate the cost of this development, in terms of loss in natural capital and environmental damage? Aside from the environmental angle, from a social point of view, GDP does not reflect quality of life, wealth distribution or income disparities between rich and poor. GDP statistics have some obvious defects, but no amendment has ever been made to them.
Since the middle of the last century, along with the development of the environmental movement and the rise of the concept of sustainable development, some economists and statisticians have tried to incorporate environmental factors in their calculations. This is what is called “green GDP.” It is the adjustment of GDP indicators to represent GDP after deducting environmental costs. Experts in China and the rest of the world have worked on this in recent years, and although some progress has been made, there are still many points of contention. Some countries have already adopted green GDP calculations on a trial basis, but there has never been a green GDP assessment model that is accepted by all nations. No government has ever announced their green GDP results.
Implementing green GDP throws up a number of technical and ideological difficulties.
Firstly, GDP takes the market as a precondition. Once a product or job comes to the marketplace, its value is decided by supply and demand. It has a market price, and its worth can only be defined when it is sold. That is to say, the only authoritative way to calculate GDP is by looking at free market prices. But how do we evaluate environmental factors? They are not sold on the market, after all. When a forest is chopped down and the logs are sold, there is a price that can be counted in a GDP calculation. But how can we measure losses caused by the death of animals whose lives rely on the existence of the forest? Or the losses of soil and water caused by the forest disappearing? The animals and the soil do not have market prices. We don’t yet know how to define their value.
Many methods for calculating this have been proposed. They are as yet imperfect, but can only be reinforced and improved with time. But in some cases, the environmental cost of a specific project can actually be evaluated through market pricing. For example, pollution in southwest China’s Dianchi Lake has been very serious in the past several decades due to pesticide runoff from surrounding farmlands and waste from nearby chemical plants. Add together the total profits of those surrounding farmlands and the chemical plants, and it will come to several billion yuan. But to make the water of Dianchi as clear as it was previously, and turn poor-quality “category five” water into good-quality “category two” water, it would costs tens of billions of yuan. Calculated in this way, even without including other losses – such as vanishing species of fish – the economic activities around Dianchi Lake are making a huge loss.
Green GDP would also mean a great change in our ideas: a completely new way of thinking about development and the evaluation of officials’ political performance. Once green GDP is implemented, the word “development” will have a different meaning and a different measure. By deducting the environmental cost, the data for economic development of some areas will decrease greatly. This means that green GDP also will lead to great changes in the performance evaluation system for cadres. In the past, GDP was the main evaluating factor in the performance assessment of local officials. Many cadres will find it difficult to combine economic growth, social development and environmental protection, and may try to resist this change. Changes in ideas have to win out over time, through gradual, difficult processes. A reform such as this will increase fairness and efficiency, and is a great development in the theory of the socialist market economy. We should expect that along with the development and implementation of green GDP, the degree of environmental protection will become important evaluation criteria in the promotion of officials.
We must work hard to establish a green GDP that is suited to China’s particular characteristics, and make our contribution to the development of green GDP throughout the world.
Green GDP elsewhere
Although it is difficult to calculate environmental costs in green GDP, great progress has been made in developed countries.
In Norway, the calculation of natural resources costs started in 1978, with a focus on water, biological, mineral and other ecological resources. Other factors such as soil and air pollution, as well as two kinds of water pollution (nitrogen and phosphorus) are also included. For this purpose, they have built a very detailed statistical system that includes energy expenditure, forests, fisheries, recycling, as well as air and water pollution.
Emulating Norway’s example, Finland also set up a natural resource calculation system that includes forest resources, air pollution and environmental protection expenditure, of which forest resources are the most important. In calculating forestry resources and air pollution, physical quantities are taken into account, whereas monetary value is used to calculate environmental protection costs. Other developed countries, such as France and the US have also considered a green GDP system. And although Mexico is a developing country, it has also implemented a green GDP calculation. Supported by the United Nations, Mexico in 1990 included petroleum, land usage, water, air, soil and forest resources in its calculations of the environmental costs of development. Information on natural capital loss is evaluated to ascertain economic losses, as well as the costs of environmental degradation. Mexico’s calculation methods have also begun to be implemented in Indonesia, Thailand, and Papua New Guinea, and the experience of these developing countries may have more reference value for China.
In 1997, the World Bank continued these efforts by publishing Expanding the Measure of Wealth, a report that highlighted four major aspects of wealth that had been overlooked: natural capital, production capital, human capital and social capital, thereby allowing the meaning of “wealth” to become larger.
Since 2003, China’s National Bureau of Statistics has made material evaluations of the country’s natural resources. This calculation is an important base for the development of green GDP. In 2004, the National Bureau of Statistics and the State Environmental Protection Administration formed a joint green GDP unit, which has been actively carrying out research and experiments.
There is an important relationship between green GDP and public participation. Public evaluation is an important way of determining green GDP, already applied in a number of countries, since environmental risks are often very difficult to evaluate monetarily. For example, to calculate the ecological effects of large construction projects, public opinion is often consulted. Independent, professional consultants conduct public surveys to canvas public opinion. People will make a truthful assessment of a project when it is so closely related to their physical and mental health. Therefore, green GDP needs to include public participation. We must listen to public opinion on economic benefits and environmental costs, and use these opinions as a dimension of the green GDP system.
Public participation in environmental protection is part of the development process of a socialist democracy. We need economic development, but we also need a healthy natural environment and a fair and harmonious society. Sustainable development should include three aspects: economic growth, social development and environmental protection. These three aspects must be balanced if we want to create a human-oriented society. Public participation is a key factor that reflects the development of a society, and is a requirement for of both economic growth and environmental protection.
In establishing green GDP, we should not rely too much on technical tools, which will be continually improved. Scientific data is certainly very helpful in making correct decisions, but public participation and democratic processes are the determining factor that will ensure the majority of people benefit from the system. Environmental protection is impossible without broad participation and public support. Therefore, at the same time as establishing green GDP, we should also work hard on public participation. Otherwise, environmental protection and green GDP calculations will become a job for a small number of people – and will certainly fail.
Changing GDP from a measurement of economic growth to a measurement of natural resources, environment and social development is a great challenge and a great hope. Let’s get to work.
Pan Yue is deputy director of China's State Environmental Protection Administration (SEPA). Part of a new generation of outspoken Chinese senior officials, Pan has given rise to a tide of environmental debate, attracting enormous attention and controversy. This essay was first published (in Chinese) as A talk about green GDP (2004).
This article first appeared in the Ecologist March 2007