February 01, 2004
The Economics of Tree Hugging
Interview printed in GSAS Bulletin 33 (6), February 2004, Graduate School of Arts and Sciences, Harvard University.
How did you develop your environmental awareness?
Like for most people, it started quite early, with recycling in kindergarten and so on. But the first time I became aware of the interplay of the environment and the economy was in tenth grade in Austria when my English teacher handed me a copy of Al Gore's Earth in the Balance. Basically, it's a manifesto on what we ought to do to save the planet. There was this one paragraph in which he talked about how the most fundamental economic measurement is GDP, and that how we deal with GDP right now is completely at odds with the goal of the environmental community.
In what way?
There's nothing wrong with GDP as a proxy for economic power or economic output. But in many ways, the focus on boosting GDP is contrary to what is important to overall well-being. For example, environmental degradation adds to GDP. If Brazil cuts down its entire rainforest and sells off its trees this year, GDP would jump by an enormous amount because the market value of all those trees gets added to GDP. But nobody subtracts the fact that... those trees are no longer there.
Is green accounting an alternative to GDP?
No, ideally it would supplement our current economic accounts. Again, there's nothing wrong with GDP as a measure for economic output. But in many cases that's not what it is being used for. We use GDP figures as a proxy for how well we are doing as a nation, [as if it is] a proxy for overall well-being or even happiness.
GDP doesn't measure non-market goods and services. That's where the "green accounting" work comes in. I believe most economists would say that [green accounting] doesn't have anything to do with being green or being environmental, or being anti- or pro-industry. It's simply good economics: accounting for all inputs, including our environment. You account for how much labor is out there in the economy. You account for machines and other capital. But one big item missing [from our accounts] is natural capital. Green accountants would argue that, in addition to having capital and labor accounts, there should be accounts for natural capital: timber, subsoil assets, water resources, and clean air.
Where is green accounting being done?
Sadly, it often depends on the initiative of private groups or foundations. There are a few official case studies and some governments, such as the Netherlands or the Philippines, are producing semi-official numbers. But basically no country does it seriously, as in publishing quarterly figures, [and saying] here's our GDP and here's our GDP adjusted for environmental measures.
Why not?
Because of a lack of will and lack of knowledge. Traditional economic accounts haven't been around for that long either. It was actually a Harvard professor, Simon Kuznets, who came up with the theory of how we should measure economic output. That effort in a sense helped pull the US out of the Great Depression. Before that, we didn't know how well we were doing in [terms of] economic output. Kuznets came up with the first accounts, and [output] has been measured ever since.
Unfortunately, governments don't see a similar urgency for greening GDP. Even though in the '50s or '60s Kuznets was one of the first and most vocal advocates in saying, "GDP is good, but use it for measuring economic output and economic output only. Don't use it as a proxy for societal well-being because that's not what it's intended to do."
On a technical level, it's immensely difficult to agree on appropriate measures. Should we just stick to things that you can touch, like forests, coal, oil, natural gas? Or should we also measure open space or clean air? The question is: What do we care about? It gets complicated pretty quickly.
What do you think should be included in the measures?
That's a tough one. Most importantly, we should make sure to create a separate account for [each resource]. If you don't believe in the clean air account, then add up everything else and use that as your measure.
In terms of what should actually be reported, ideally it would be some sort of multidimensional measure. Say, GDP went up by 7.2 percent last quarter. But people are working more and [taking] less vacation; the timber stock is going down; and [the environment is becoming] more polluted. Then you might say [that] economically we are doing better, but everything else is worse, so maybe we should try to scale down our economic activity for a while and try to focus on other factors.
Do you approach your scholarship from an activist's viewpoint?
I wear Birkenstocks, if that counts for anything. But seriously, the question is always: Where can you have the most impact? No matter which topic it is in the environmental movement, your influence stops as soon as economics starts. You can argue for preserving trees [until] it goes against, say, employment and you have real, hard economic data that 100,000 people are going to be out of work because you are trying to save trees. If you're an environmentalist, you have to [ask yourself] am I an environmentalist because I care about trees or because I care about people? I would say I'm an environmentalist because I care about people.
It's tough then to make choices. You can really only make [them] as soon as you actually compare apples to apples. As in, you have hard economic data supporting the fact that you lost 100,000 jobs, so you need hard economic data saying that these trees are actually worth something in real dollar figures. With green accounting, you could determine the economic value of these trees [because] they purify water, provide watershed protection, and produce oxygen. They also have timber value and provide recreational benefits, which you can put a dollar value on.
Some people would say there's a lot of carbon monoxide in the air but it hasn't killed me yet, or we took out ten acres to build a WalMart but I can buy a DVD player for only $29. How do you combat that kind of disdain for environmental and ecological factors?
In the end, it comes down to valuing human life. Economists usually have a tough time selling this, but what they talk about is a statistical life. We would never say one person is worth a million bucks, another is worth two million, and a young and healthy person is worth eight million bucks. You would never say that individually, but statistically we do put a dollar value on human life.
Say one human life in the US, statistically speaking, is worth $3.8 million. How many lives do you save by decreasing carbon monoxide emissions per pound, and how many trees do you need to plant to do that? If you plant a thousand trees to save one life, then every tree's air purification services are worth $3,800.
Do you have a mentor?
I have been fortunate to have Professor Dale Jorgenson as my advisor. He was the first person to introduce me to the academic side of green accounting.
Other professors at Harvard are also working on this issue: Robert Stavins, Bill Clark, David Cutler, and Martin Weitzman, who pretty much started the entire field. He showed that it makes theoretical sense to use comprehensive, annual income figures as a proxy for overall well-being. I'm still trying to understand his latest book on the subject, but once that happens, I'll be knocking on his door again.
Download February 2004 GSAS Bulletin as a PDF.