Thursday, June 7, 2012

Move over GDP; there’s a new index in town (and it values the environment, too)

Over the last several months, some of the big players in the world economy have rolled out new approaches to valuing economies that go beyond the gross domestic product (GDP) approach developed in the 1930s. The new approaches increasingly seek to place a monetary value on the environment. For instance, in February, the United Kingdom established a Natural Capital Committee to value its environmental wealth in terms of air quality, fresh water, wildlife and other natural resources. India committed to doing the same back in 2010.

Earlier this month, the World Bank unveiled its new Environmental Strategy for the next decade, which is intended to assist countries in building “green, clean, and resilient” economies. A key priority of the World Bank’s new approach is its Wealth Accounting and Valuation of Ecosystem Services (WAVES) global partnership which supports countries’ efforts to factor natural capital into national accounting systems.  (Data hounds will want to check out the Little Green Data Book - 2012.) 

Perhaps of most significance on this front, though, is a report due to be released at the UN’s Rio+20 sustainability conference that is just a few weeks away. At the conference, a new measure will be unveiled, the Inclusive Wealth Index (IWI). From the press release:

The Inclusive Wealth Report, developed by UNU-IHDP (hosted by UNU-ViE) and UNEP, is based on a new economic indicator that measures natural, human and produced capital and can provide guidance for economic development towards sustainability. Scheduled to be published at Rio+20, it will describe the capital base of 20 nations, among them Brazil, China, Germany, India, Kenya and Venezuela.

Brazil and India pay a high price for rapid economic growth, according to experts speaking at a major international meeting in London, Planet under Pressure.

Between 1990 and 2008, the wealth of these two countries as measured by GDP per capita rose 34% and 120% respectively. But a myopic focus on economic capital is flawed, scientists and economists at the conference argue. Natural capital, the sum of a country’s assets, from forests to fossil fuels and minerals, declined 46% in Brazil and 31% in India, according to a new “Inclusive Wealth Indicator” designed to augment GDP as a measure of economic progress.

When measures of natural, human and manufactured capital are considered together to obtain a more comprehensive value, Brazil’s “Inclusive Wealth” rose just 3% and India’s rose 9% over that time.

“The work on Brazil and India illustrates why Gross Domestic Product is inadequate and misleading as an index of economic progress from a long‐term perspective,” says Professor Anantha Duraiappah, Executive Director of the United Nations University’s International Human Dimensions Programme (UNU‐IHDP).

“A country could completely exhaust all its natural resources while posting positive GDP growth. We need an indicator that estimates the wealth of nations – natural, human and manufactured and ideally even the social and ecological constituents of human well‐being.”

The new metric will be detailed in a new book to be published concurrently with Rio+20 called Inclusive Wealth Report 2012:  Measuring Progress Toward Sustainability.  The implications of valuing “natural capital” appear huge to me, though I don’t know if it always cuts in the environment’s favor. If nothing else, the ability to place a dollar figure on the environment would have the seeming ability to create an "apples-to-apples" comparison with economic development.  But environmentalists leading the charge, I think, must presume that the numbers they will arrive at for natural capital will be large, in fact, so large that they will be a tool to challenge economic development projects that don’t pencil out when you factor in the environmental harms. Would it always work that way? How might such numbers be used against the environment? How would the above-quoted UN analysis play out in the politics of Brazil and India? As those of us in the land use world know, so many decisions about the shape of our communities—the land use decisions that shape the relationship between economy and environment—happen at the local level. Will the economic analysis of natural capital be of sufficient specificity to allow local governments to analyze potential projects in light of “nature’s economy”? I am intrigued by these projects, but also maintain a skepticism at this time as to how they will be used as tools. I will be curious to hear back from those attending Rio+20 on this issue and the reception of the IWI metric.

Stephen R. Miller

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