The Role of Green Accounting In the Creation of Indicators of Sustainable Economic Growth

Abstract

Gross domestic product (GDP) is the most widely utilized measure of economic growth worldwide. The GDP is often mistakenly used as a measure of social welfare, even though it was never meant to be used as one. The GDP is a poor indicator of economic wellbeing because of, among other reasons, its lack of inclusion of environmental damages. This is because many natural resources do not have a market price. In addition, costs incurred from cleaning pollution or repairing environmental damages, known as defensive expenditures, actually increase the GDP. Alternative indicators of economic growth must be created in order to account for and reflect aggregate social wellbeing, as well as the use of environmental resources that do not have a market price. Since the late 1980s there has been some progress towards this end; the development of what is known as green accounting. Green accounting stresses placing values on the environment by accounting for the depreciation of natural capital. Doing this helps to correctly take natural resources into account in indicators of sustainable economic growth. The objective of this SIP is to show how economic growth, as enumerated by GDP, would be different for indicators of aggregate economic performance that consider the sustainable use of the environment. To bring this issue into a clear view, two case studies are examined: the first one explains how pollution and pollution abatement procedures affect China’s GDP. The second case study discusses the differences between the GDP and an indicator of sustainable economic growth in Austria. Both of these case studies show that the GDP is flawed with regard to the environment, and that the GDP does not represent sustainable economic growth.