Environmental Protection Boosts Productivity

"Adopting an actual price on carbon emissions and incorporating them into the market economy would affect decisions throughout the economy and help prevent harmful climate change."

By Robert Repetto on May 9, 2016

"Adopting an actual price on carbon emissions and incorporating them into the market economy would affect decisions throughout the economy and help prevent harmful climate change."

In the most notable economics book so far this year, The Rise and Fall of American Growth, Professor Robert Gordon argues that the productivity gains of the last half century haven't matched the life-changing innovations of the previous period: electricity, automobiles, piped water and sewage, radio and telephone, antibiotics and others. This suggests, he concludes, that future growth prospects are more limited.

But, as he acknowledges, the usual measures of economic growth and productivity don't fully measure changes in living standards. For example, while Gross Domestic Product (GDP) increased by 238 per cent between 1970 and 2014, the volume of air pollutants (particulates, sulfur and nitrogen oxides, ammonia, and others) declined by 69 per cent, because in the early 1970s, the federal Clean Air Act Amendments and other important environmental protections were enacted. Cleaner air has brought significant benefits, mainly through large reductions in sickness and premature mortality from cancer, cardiovascular and respiratory diseases.

Conventional productivity measures don't capture these gains because they measure only an industry’s "good" outputs, which are sold, and ignore the "bad" outputs, which are often dumped into the air, water or land. Economists have rarely bothered much about the laws of thermodynamics, but Isaac Newton explained that material and energy are conserved—or, as Sesame Street's Big Bird put it: you can’t make nothing out of something. When coal is burned, everything goes somewhere and causes damages: all the carbon, the sulfur, the mercury, the arsenic, etc.  

If the resulting damages are measured in economic terms, as environmental economists have done, it becomes obvious that industries can raise productivity in two ways: by raising output relative to inputs (the way that is conventionally measured) or by reducing the bad outputs relative to the good outputs. In an earlier study, I have shown that adjusting the productivity estimates to capture this second way can significantly change the record.

Yale economists who estimated air pollution damage costs as of 2002 found that they amounted to between 0.7 and 2.8 per cent of GDP. Taking this benchmark of 2 per cent of GDP, the growth rates of GDP and the rate of decline in air emissions since 1970, I find that the contribution of improved air quality to total factor productivity growth, correctly measured, has been about 0.1 per cent per year, about 10 per cent of the historical trend. This greatly reduces the difference in productivity growth between the earlier and later periods, except for the remarkable temporary spurt in the decade during and after World War II.

If measures of airborne emissions were available to make it possible to carry out the same calculation for the period 1870 to 1970, it would be obvious that productivity growth in that era would be overstated by at least as much. The rapid growth of steel, chemicals and other auto-related industries, along with the rapid increase of electricity generation and other industrial growth, increased air pollution. Though national statistics aren't available, this chart of air quality in Pittsburgh provides an idea. Air quality deteriorated badly in this industrial city in the first half of the 20th century and improved just as dramatically after 1970.

The unmeasured increase and decrease in productivity growth because of these environmental trends was even starker, for two reasons. First, the earlier period was one of rapid urbanization. A tonne of pollutants released over cities is more than twice as damaging as a similar tonne discharged over rural areas because it affects many more densely-packed households, so the cost of air pollution damages increased even more rapidly than the increase in the tonnage of emissions in the earlier period. Secondly, the health effects of air pollution are greatly aggravated by cigarette smoking, which increased from virtually nothing in 1870 to a peak in 1970 and thereafter declined significantly to the present time. Taken together, the rise and decline in air pollution over the last century could fully account for the difference in measured productivity growth before and after 1970.

This raises important questions. First, how should we measure economic progress? Many economists, including myself, have argued for years that the GDP and related economic accounts, such as productivity growth, should be expanded to include environmental costs and benefits. In those expanded accounts, production would include production of harmful pollutants. The calculation of an industry's added value would incorporate the negative value of the pollution it creates. The Yale study mentioned above found that coal-fired power plants actually have had negative value added because the damage done by its air pollution has been so large.

Despite the recommendations of high-level commissions, ministerial meetings, the National Academy of Sciences, and numerous studies and influential pronouncements, this improvement has still not been implemented. The result is continuing confusion about the rate of economic growth and its causes. There are many who still argue spuriously that environmental protection is a drag on economic productivity, not a source.

Second, what kind of growth do we want—or, growth in what? There are many who have made GDP growth a central political and economic goal. Small changes in GDP growth rates are taken as indicators of success or failure in economic policy. Others have argued for a "no-growth" society, holding that economic growth does more harm than good. Surely, though, there are things we want more of, such as a stable climate; better schools; more efficient, effective and accessible health care; more livable cities; and upgraded transportation infrastructure. There are also undoubtedly things we want less of, such as pollution and the spending needed to clean up after disasters that might have been prevented. Rather than focus on a highly aggregated and undiscriminating measure such as GDP, shouldn't policy discussions focus attention on what we want to increase and what we want to eliminate?

The federal government has taken a step in the right direction by estimating the "social cost of carbon," which measures the damage caused by the release of an additional tonne of carbon into the atmosphere. This figure is being used in government planning decisions and could be incorporated into the national economic accounts, countering the argument that protecting against climate change would impose an economic burden and showing that rapid improvements in renewable energy technologies not only reduce energy costs but also reduce economic damages from carbon emissions. An even more important step would be to adopt an actual price on carbon emissions, incorporating them into the market economy, which would affect decisions throughout the economy and help prevent harmful climate change.

This article was originally posted on the Energy Future Coalition website on April 27, 2016, and is reprinted here with permission.