Environmentally Adjusted Multifactor Productivity: Methodology and Results for OECD and G20 Countries

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Myrtle Simmons
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Environmentally Adjusted Multifactor Productivity: Methodology and Results for OECD and G20 Countries 1 st Meeting of the OECD Network on Agricultural Total Factor

1 Environmentally Adjusted Multifactor Productivity: Methodology and Results for OECD and G20 Countries 1 st Meeting of the OECD Network on Agricultural Total Factor Productivity and the Environment Paris, May 2017 OECD Conference Centre Ivan Haščič, Miguel Cárdenas Rodríguez, Martin Souchier (OECD Environment Directorate)

2 Why the interest in EAMFP measurement? Traditional measure of productivity growth: A comprehensive measure: Accounts for multiple factor inputs A measure of economic performance, links with material living standards Insights about long-term growth prospects Environmentally adjusted measure of productivity growth: A comprehensive measure: Accounts for multiple factor inputs including the consumption of natural resources and production of undesirable outputs Potential to foster greater consideration of environmental concerns in economic policy decisions Insights about ways to achieve more sustainable long-term growth Starting point to analyse drivers of green growth 2

3 How is EAMFP measured? Growth accounting Traditional measurement framework: GDP growth = Contribution of labour + Contribution of produced capital + Multi-factor productivity (MFP) Extended framework (Brandt, Schreyer, Zipperer 2014; 2013): (GDP growth + undesirable output R growth) = Contribution of labour L + Contribution of produced capital K + Contribution of natural capital S + Environmentally adjusted multi-factor productivity (EAMFP) 3

Methodology Extended measurement framework Growth accounting at the aggregate economy level Start with a transformation function: Log-differentiation yields: = ε YL lnl t Contribution of labour + ε

4 Methodology Extended measurement framework Growth accounting at the aggregate economy level Start with a transformation function: Log-differentiation yields: = ε YL lnl t Contribution of labour + ε YK lnk t Contribution of prod. capital = ε YL lnl t Contribution of labour + ε YS lns t Contribution of natural capital + ε YK lnk t Contribution of prod. capital + lneamfp t EAMFP + ε YS lns t Contribution of natural capital 4

5 Methodology Extended measurement framework GDP growth + Adjustment for pollution abatement Calculated using elasticity of GDP growth w.r.t. pollution (using a Random Coefficients Model) and emissions = Contribution of labour Calculated using the hourly wage and total hours worked + Contribution of produced capital Calculated using the user cost of capital and produced capital + Contribution of natural capital Calculated using the unit rent and natural capital extraction + EAMFP 5

6 46 countries (OECD + G20) from 1991 to 2013 GDP, labour and produced capital 1) OECD Productivity base 2) Total Economy base 3) World Bank World Development Natural assets: fossil fuels (oil, gas, hard coal, soft coal) + minerals (iron ore, bauxite, copper, lead, nickel, tin, zinc, gold, silver, phosphate) 1) OECD Natural Assets Accounts 2) World Bank Wealth Accounting and the Valuation of Ecosystem SEEA Services (WAVES) Air pollutants: GHG (CO 2 CH 4 N 2 O) + SO X NO X PM 10 CO NMVOC 1) OECD Air Emissions Accounts 2) OECD Emission of Air Pollutants 3) OECD Greenhouse Gas Emissions by Source 4) Emissions base for Global Atmospheric Research (EDGAR) 6

Pollution-adjusted GDP growth Long-term average, circa 1991-2013 Countries that have increased emissions have their GDP growth

7 Pollution-adjusted GDP growth Long-term average, circa Countries that have increased emissions have their GDP growth adjusted downward Countries that have decreased emissions have their GDP growth adjusted upward The adjustment is small for some countries 7

Sources of growth Long-term average, circa 1991-2013 The contribution of natural capital is important in some countries Some countries

8 Sources of growth Long-term average, circa The contribution of natural capital is important in some countries Some countries are becoming less dependent on natural resources to sustain growth EAMFP growth is the main component of output growth for most countries. 8

9 9

10 EAMFP Germany Japan Korea China 10

11 Contribution of Natural Capital Chile United Kingdom Russia Saudi Arabia 11

12 Adjustment for pollution abatement Germany Japan India China 12

13 Why does it matter? EAMFP allows economic performance to be assessed more accurately If it is not adjusted, productivity growth can be overestimated in countries where output growth: Relies on depletion of natural capital Relies on heavily polluting technologies productivity growth can be underestimated in countries that Invest in more efficient use of (domestic) natural resources Invest in pollution abatement 13

14 Next steps Future updates will draw on improvements in the underlying data: Natural resource accounts (SEEA) Subsoil assets improve country coverage, monetary valuation, possibly add other mineral types (e.g. rare earths) Renewable assets freshwater, soil, land, forest, aquatic Emissions accounts (SEEA) Air emissions - improve country coverage Water emissions, Waste, Nutrients Understand drivers of EAMFP Empirically analyse EAMFP. Do traditional drivers of productivity have the same effect on the adjusted measure? 14

15 Thank you for your attention! EAMFP webpage: oe.cd/eamfp OECD (2017), Green Growth 2017, OECD Publishing, Paris. 15

Greening productivity measurement Environmentally adjusted multifactor productivity growth

Greening productivity measurement Environmentally adjusted multifactor productivity growth Policy Perspectives 2. Greening productivity measurement 1 The framework Towards a more comprehensive picture