Macroeconomic View

Table 2-1 provides a sample of important macroeconomic indicators responsive to challenges of sustainable development in the twenty-first century. Each indicator is linked to one of five macroeconomic objectives common to popular sustainable development frameworks:

• promoting genuine progress based on multiple dimensions of human well-being,

• fostering a rapid transition to a renewable energy platform,

• equitable distribution of both resources and opportunity,

• protecting and restoring natural capital, and

• economic localization.

Since the late 1980s, researchers have been working to develop substitutes for GDP that address the costs and benefits of economic activity on environmental and social dimensions of well-being. Collectively, these indicators are known as "green" GDP accounting systems, the most comprehensive of which is the genuine progress indicator (GPI) and its variants.

The GPI is designed to measure sustainable welfare and thus replace GDP as a nation's most important yardstick of economic progress. It adjusts a nation's personal consumption expenditures upward to account for the benefits of nonmarket activities such as volunteering and parenting and downward to account for costs associated with income inequality, environmental degradation, and international debt. The GPI has been reviewed extensively in the scientific literature and found to offer the greatest potential for measuring national sustainable development performance.10

Redefining Progress has done a breakdown of GPI contributions and deductions for the United States in 2004. (See Table 2-2.) These calculations show the GPI at $4.4 trillion, compared with a GDP of nearly $10.8 trillion, implying that well over half of the economic activity in the United States that year was unsustainable and did not contribute to genuine progress.11

GPI accounts for the United States and many other countries show the gap between GPI and GDP widening since the mid- to late 1970s. Economists call this divergence the "threshold effect." It implies that after a particular threshold, environmental and social benefits of economic growth are more than offset by rising environmental and social costs. Before that point is reached, genuine progress generally rises with GDP.12

Despite its theoretical validity, the GPI and other green accounting systems have yet to be formally adopted by national governments as replacements for GDP—perhaps because the news they communicate is so sobering. In early 2007, the Chinese government abandoned its efforts to develop a green GDP; preliminary results of the project showed pollution-adjusted growth rates to be

A New Bottom Line for Progress

Table 2-1. Sustainable Development Objectives and Macroeconomic Indicators

Economic Objective

Sample Indicators and

Description

Desired Direction of Effect

Genuine human

Genuine progress indicator (+)

Aggregate index of sustainable economic welfare

progress

Happy planet index (+)

Aggregate index of well-being based on life

satisfaction, life expectancy, and ecological footprint

Well-being index (+)

Aggregate index of well-being based on health,

wealth, knowledge, community, and equity

Human development index (+)

Aggregate index of well-being based on income,

life expectancy, and education

Renewable energy

Carbon footprint (-)

Provides spatial and intensity measures of life cycle

platform

carbon emissions

Energy return on investment

Ratio between energy a resource provides and the

(+)

amount of energy required to produce it

Energy intensity (-)

Energy used per unit of economic output

Social equity

Index of representational

Measures consistency between ethnic composition

equity (-)

of elected officials and that of the general popula

tion; zero indicates "perfect" consistency

GINI coefficient (-)

Measures extent to which an income distribution

deviates from an equitable distribution; zero indi-

cating "perfect" equity

Legal rights index (+)

Measures degree to which collateral and bank-

ruptcy laws protect rights of borrowers and

lenders, scale of 0 to 10.

Access to improved water

Percent of population with access to improved

and sanitation (+)

water and sanitation services

Protect and restore

Ecological footprint (-)

Ecologically productive land and ocean area appro-

natural capital

priated by consumption activities

Genuine savings (+)

Net investment in human-built and natural capital

stocks adjusted for environmental quality changes

Environmental sustainability

Weighted average of 21 separate environmental

index (+)

sustainability indicators

Economic

Local employment and income

Direct, indirect, and induced local economic activity

localization

multiplier effect (+)

generated by a given expenditure

Ogive index of economic

Measures how well actual industrial structure

diversity (-)

matches an ideal structure; zero indicates "per-

fect" diversity

Miles to market (-)

Average distance a group of products travels

before final sale

Table 2-2. Genuine Progress Indicator Components and Values, United States, 2004

A New Bottom Line for Progress

Component

Contributions nearly zero in some provinces. Nonetheless, there are dozens of encouraging pilot programs implemented by national governments and nongovernmental organizations (NGOs) to apply various green accounting systems.13

A recent global assessment found green accounting programs in place in at least 50 countries and identified at least 20 others that were planning to initiate such programs soon. Broader GPI applications that consider factors such as social equity or the value of nonmar-ket time uses are thus far relegated to academic institutions or NGOs such as Canada's Pembina Institute, which calculates an Alberta GPI and uses it to inform policy debates over economic diversification, trade, transportation, taxes, and many other economic, social, and environmental issues.14

Other macroeconomic indicators have been created to supplement GDP with information on overall well-being. One example is the happy planet index (HPI), first published by the New Economics Foundation and Friends of the Earth in 2006. The authors note that the HPI "measures the ecological efficiency with which, country by country, people achieve long and happy lives." The basic formula is to multiply a country's self-reported life satisfaction index (determined through surveys) by its average life expectancy and then divide by its ecological footprint. The

Amount

(billion dollars)

Table 2-2. Genuine Progress Indicator Components and Values, United States, 2004

Component

Contributions

Amount

(billion dollars)

Weighted personal consumption expenditures

(adjusted for inequality)

+

6,318.4

Value of housework and parenting

+

2,542.2

Value of higher education

+

828.0

Value of volunteer work

+

131.3

Services of consumer durables

+

743.7

Services of streets and highways

+

111.6

Net capital investment (positive in 2004,

so included in contributions)

+

388.8

Total positive contributions to the GPI

$11,064.0

Deductions

Cost of crime

-

$34.2

Loss of leisure time

-

401.9

Costs of unemployment and underemployment

-

177.0

Cost of consumer durable purchases

-

1089.9

Cost of commuting

-

522.6

Cost of household pollution abatement

-

21.3

Cost of auto accidents

-

175.2

Cost of water pollution

-

119.7

Cost of air pollution

-

40.0

Cost of noise pollution

-

18.2

Loss of wetlands

-

53.3

Loss of farmland

-

263.9

Loss of primary forest cover

-

50.6

Depletion of nonrenewable resources

-

1,761.3

Carbon emissions damage

-

1,182.8

Cost of ozone depletion

-

478.9

Net foreign borrowing (positive in 2004,

so included in deductions)

-

254.0

Total negative deductions to the GPI

$6,644.8

Genuine progress indicator 2004

$4,419.2

Gross domestic product 2004

$10,760.0

Source: See endnote 11.

first HPI assessment found Central America to be the region with the highest average score due to its relatively long life expectancy, high satisfaction scores, and an ecological footprint below its globally equitable share.15

A New Bottom Line for Progress

HPI data provide further corroboration of the threshold effect. Countries classified by the United Nations as medium human development fare better than either low or high development countries. An independent statistical analysis of HPI and per capita income values for 157 countries found the two rising together up to a threshold, then diverging after that. The HPI authors concluded that "well-being does not rely on high levels of consuming."16

As with the green GDP, well-being indices have yet to gain official prominence—with one notable exception. Since 1972 the government of Bhutan has been using the concept of gross national happiness (GNH) as a sustainable development framework. According to Prime Minster Lyonpo Jigmi Y Thin-ley, GHN is "based on the premise that true development of human society takes place when material and spiritual development occur side by side to complement and reinforce each other." The four pillars of GHN are equity, preservation of cultural values, conservation of the natural environment, and establishment of good governance. Recently, a major international conference in Bhutan was held to explore GHN in more depth, including ways to put it into operation as a replacement measure for GDP.17

On the second macroeconomic objective, the transition to renewable energy, there are dozens of useful metrics such as energy intensity (which measures conservation) or energy return on investment (which is critical for evaluating the feasibility of renewable energy investments). But the most ubiquitous measure in use is the carbon footprint, which is expressed in three basic ways: emissions in tons of carbon, the area of Earth's surface needed to sequester those emissions, and carbon intensity or emissions per unit of economic output. A zero carbon footprint is an often-stated policy goal. But measuring this is quite complex. For example, communities that want to assess their carbon footprints almost universally fail to consider carbon emissions associated with imports of either intermediate inputs or final consumer goods from other regions or land use activities like logging or urban growth that reduce carbon sequestration capacity.

Nonetheless, carbon footprint analysis is a useful way to monitor progress toward greater use of renewable energy as well as to identify firm policy targets. For example, to stabilize carbon dioxide concentrations in the atmosphere at 450 parts per million, various models suggest that global emissions must be reduced by 50 percent in 2050 and 80 percent by century's end. (See Chapter 6.) Combining this reduction target with various projections of growth in gross world product (GWP) allows calculation of the required carbon footprint of all economic processes needed to achieve this goal. Even under the most pessimistic GWP growth scenario of 1.1 percent a year, the required footprint reduction is on the order of 93 percent— from 2.88 ounces of carbon per dollar today to just 0.16 ounces by 2100.18

Social equity, another macroeconomic objective, has two key dimensions: equitable distribution of resources and equitable access to health care, education, economic opportunities, representation, cultural amenities, natural areas, and everything else considered essential to a good quality of life. Quantitative equity measures already inform policy debates over taxes, affordable housing, living wages, diversity, and location of public services, and their use is on the rise. One common way to measure social equity is to compare the distribution of resources or access with some ideal distribution described as fair or equitable. The index of representational equity (IRE) and the GINI coefficient are two permutations. The IRE compares

A New Bottom Line for Progress the ethnic or racial composition of elected officials, corporate management, or any other representative body with that of the general population of the relevant jurisdiction. It measures the degree of deviation, so values close to zero indicate more equitable representation if it is assumed that leaders should reflect the diversity of the populations they represent. The GINI coefficient measures the deviation between the actual income distribution of a given nation or community and a "fair" distribution, where different income brackets earn a proportional share of national income.19

Concerning the fourth objective, in A Short History of Progress Canadian novelist Ronald Wright succinctly notes: "If civilization is to survive, it must live on the interest, not the capital, of nature." Nature's interest is the flow of goods and services received from stocks of natural capital. These stocks include wild areas, healthy soils, genetic diversity, and the various atmospheric, terrestrial, and aquatic sinks for wastes inherited from the last generation. Natural capital yields goods such as foods, medicines, organic fertilizers, and raw materials for countless manufacturing processes as well as ecosystem services such as controlling floods, recycling wastes, building soils, and keeping atmospheric gases in balance free of charge. When natural capital is lost or degraded, the flow of goods and services is compromised or eliminated entirely, just as when decimation of human capital stocks destroys a community's ability to provide shelter, communications, water supply, or energy. As such, nondepletion of natural capital stocks and ecosystem service flows is a prerequisite for sustainability.20

The ecological footprint is perhaps the best known measure of natural capital depletion. Ecological footprint analysis (EFA) compares the surface area of Earth needed to sustain current consumption patterns and absorb wastes with what is available on a renewable basis. When the footprint exceeds biological capacity, the world is engaged in unsustainable ecological overshoot and depleting natural capital. The most recent accounts published by the Global Footprint Network find that "our footprint exceeds the world's ability to regenerate by about 25%," implying that we need 1.25 Earths to sustain present patterns of consumption. While there remain some theoretical and computational challenges to resolve, EFA has nonetheless gained status as one of the world's most ubiquitous and widely used sustainability metrics. According to the Secretariat of the U.N. Convention on Biological Diversity, EFA "provides a valuable form of ecological accounting that can be used to assess current ecological demand and supply, set policy targets, and monitor success in achieving them."21

Economic localization, the fifth objective, is the process by which a region, county, city, or even neighborhood frees itself from an overdependence on the global economy and invests in its own resources to produce a significant portion of the goods, services, food, and energy it consumes from its local endowment of financial, natural, and human capital. Localization is gaining new traction as a response to the looming crises over peak oil and climate change, since the global distribution system for goods is almost exclusively based on cheap fossil fuels. The World Bank acknowledges that localization "will be one of the most important new trends in the 21st century."22

Economic multipliers and measures of economic diversity such as the Ogive index are useful indicators of localization since they show how well a community is rebuilding its manufacturing base and creating linkages between multiple sectors. Another indicator of increasing importance and use is "miles to

A New Bottom Line for Progress market," which for an individual good or group of goods measures the distance traveled (including components) from source to market. The most popular variant is food miles— a concept that illustrates the wide-ranging benefits associated with locally grown foods, such as freshness, reduced carbon emissions, higher economic multiplier effects, and the absence of resource-intensive packaging, preservatives, and refrigeration.23

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