Growth, reconsidered: Accounting for the environmental costs of development

William Nordhaus can recall the precise moment when he became interested in what is now known as “green accounting,” a type of accounting that factors environmental costs and benefits into measures of economic activity.

It was 1969, and he was thumbing through a magazine during a TWA flight to Albuquerque when he encountered an article that quoted a young political radical who dismissed gross national product as “gross national pollution.” As he read the story, Nordhaus, who would go on to become a pioneer in the field of environmental economics, wondered whether there might be truth to the statement; he realized that measures of national output did not adequately consider pollution or other environmental considerations.

This insight helped inspire the paper “Is Growth Obsolete?” which he co-authored, in 1972, with a mentor, Yale economist James A. Tobin, Nordhaus recently told an audience during the Yale Climate, Environment & Economic Growth Conference, a two-day event (held on Nov. 9 and 10) that explored the challenges of maintaining sustainable economic progress and improvements in human welfare while also protecting the environment and addressing climate change.

The landmark study introduced a new model for measuring economic growth that, for the first time, accounted for environmental damages among other new factors, like the value of leisure time or unpaid work (such as housekeeping).

The two economists concluded that growth was not obsolete and that “the broad measure of secular progress remains after the correction of the most obvious deficiencies,” Nordhaus, who received the 2018 Nobel Prize in Economics, told the audience. (Tobin, who died in 2002, was awarded the Nobel Prize in Economics in 1981.)

The seminal contribution of this work was recognized during the recent conference, which was organized by the Yale School of the Environment (YSE), the Economic Growth Center (EGC), and the Tobin Center for Economic Policy with support from Yale Planetary Solutions. (It was part of a larger climate and energy summit held across Yale and New Haven.)

On the conference’s first day, hosted by the EGC, researchers and policymakers discussed whether it is possible to have global economic growth as currently measured while drastically reducing greenhouse gas emissions. And, if so, what policies are needed to achieve it?

And on its second day, in addition to honoring the work of Nordhaus and Tobin, attendees discussed ongoing efforts domestically and internationally to move beyond gross domestic product and develop economic measurements that better consider environmental sustainability.

The conference also featured a keynote address by Esther Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at the Massachusetts Institute of Technology and a 2019 recipient of the Nobel Prize in Economics.

Redefining economic development

Earlier this year, the Biden administration unveiled a national strategy to better account for the value of natural capital, e.g. a stable climate, biodiversity, water, soil, wetlands, and forests, to the nation’s economic health. The initiative was developed in part by Yale economist Eli Fenichel, who served as an assistant director at the White House Office of Science and Technology Policy during a public service leave from Yale.

During the Yale conference, EGC Director Rohini Pande noted that a sharp decline in global poverty over the past 30 years has coincided with steep economic growth driven in large part by booms in China and South Asia. Over the same period, she said, global energy consumption has doubled.

“You can look at pretty much every country today, and you’ll find politicians talking about how boosting economic growth is a top priority and at the same time saying that they want to cut emissions,” said Pande, the Henry J. Heinz II Professor of Economics in Yale’s Faculty of Arts and Sciences. “I think if we recognize the reality that economic development or growth is going to remain a priority, we perhaps need to think about how we’re going to redefine or expand it.”

In her keynote address, Duflo discussed the glaring inequalities in the causes and effects of climate change between rich and poor countries and individuals.

She outlined the creation of a permanent funding mechanism to help low-income countries adapt to climate change and reduce their own greenhouse-gas emissions. 

Duflo estimated that this would cost about $500 billion per year, which she said could be funded by a minimum global corporate tax and global wealth taxes. “This is what we owe to poor countries for killing them,” she said.

The day’s discussions highlighted the important role institutions can play in guiding the climate transition by redistributing resources, setting regulations, and promoting innovation. The day closed with an interdisciplinary panel on the importance of communication between climate scientists and economic modelers in formulating effective policy.

Nick Ryan, associate professor of economics at Yale and one of the conference’s organizers, discussed the role that Yale’s economists will play in driving key parts of this agenda forward.

“How much is climate change going to affect the economy and people's lives, and how do our regulatory institutions have to change?” Ryan said. “A diverse set of economists at Yale can lead in diagnosing the problem and charting a path forward.”

‘An amazing responsibility’

On the conference’s second day, Fenichel, the Knobloch Family Professor of Natural Resource Economics at Yale School of the Environment, discussed his experience at the White House devising the national strategy to use data and statistics to guide environmental-economic decisions. The initiative, which will be rolled out gradually, seeks to make it easier to evaluate the economic role of natural resources, such as wetlands that provide flood control and enhance water quality while supporting biodiversity, ski mountains that generate tourism, or forests that provide timber, purify water, and remove carbon dioxide from the air. 

Creating the national strategy taught Fenichel the importance of working with people who do not fully share his priorities, he said.

“As an economist, what I learned in the White House is that economists need to think about endpoints other than [human] welfare without losing sight of welfare,” said Fenichel, who returned to Yale from the White House in March. “Welfare is really important, but we need to understand how to talk to people who just don’t care about welfare.”

He also emphasized the importance of achieving scale and replicability in potential policy interventions while seeking to transform rigorous academic research into public policy. And he reiterated the lasting influence of “Is Growth Obsolete?” and Nordhaus’s subsequent work in the creation of the national strategy. 

“‘Is Growth Obsolete?’ created this amazing legacy but when someone else creates an amazing legacy it creates an amazing responsibility for all of us to build on that legacy,” Fenichel said.

Other participants discussed important efforts to build on Nordhaus and Tobin’s ideas.

Jed Kolko, under-secretary of commerce for economic affairs, explained how accounting for natural resources helps strengthen the U.S. statistical system. Csaba Kőrösi, the 77^th president of the U. N. General Assembly, spoke about the critical importance of environmental indicators in achieving sustainable development. Sarah Kapnick, the National Oceanic and Atmospheric Administration’s (NOAA) chief scientist, discussed the benefits of the rapid increase in environmental data.

Nordhaus, not content to rest on his legacy, spent a substantial portion of his keynote contributing to the conference discussion on how to best account for the environment in measuring growth. He suggested that the effort should focus on six key areas: subsoil assets (minerals), forests, water, climate, air pollution, and land — which broadly align with the priorities in the new U.S. strategy.

“These are the big game, so to speak, in terms of the [areas] likely to have the biggest numbers, the biggest impact on our measures,” he said. “They pose really interesting technical, social, political, economic problems.”

He expressed dismay at how far behind the United States has fallen in measuring the impact of the environment on growth but suggested that the new White House initiative is promising.

“I think it will be a big contribution to [the United States] and the international community,” he said.