The implications of GrDP for policy and businesses
Adopting GrDP would enable policymakers to consider the impact of all pollutants when designing policies and give business decision makers and stakeholders a clearer way to understand the true cost of industrial activity. For example, electrifying transport systems by substituting fossil fuels for renewables would contribute to reducing both GHGs and air pollutants. However, adopting synthetic fuels manufactured using captured CO2 and hydrogen could play a crucial role in reaching net zero by closing the carbon loop, but would have little impact on air pollutants which are still generated in the combustion of synthetic fuels. Decarbonization, when properly designed, could lead to significant co-benefits, and enhanced GrDP growth.
GrDP can be downscaled to provide a more detailed picture of the value added of each industry, as illustrated in the forthcoming E4S white paper Going Beyond GDP: the Swiss Green Domestic Product (2022), where we assess the decoupling between growth and pollution at the sectoral level. This increased granularity can help investors and innovators to identify industries experiencing rapid (net) growth, and, on the contrary, slow-decarbonizing industries that will require heavy investment and innovative solutions to meet the net zero target.
For business leaders, faced with growing demand from stakeholders for clear information on ESG footprint, GrDP provides additional data and a powerful contextual tool to frame their approach to impact measurement and, by extension, decision making. GrDP is only a first step towards the adoption of environmental accounting – e.g., corporate earnings before interest and taxes could be adjusted following a similar methodology to account for environmental profit and loss. Measuring and valuing external costs would enhance awareness of the true cost of activities and increase the transparency of supply chains, facilitating the choice of suppliers and potentially leading to greater pressure for industry to adopt greener practices.
Nonetheless, a systemic view is crucial when dealing with global pollution such as GHGs. For instance, electrifying the vehicle park of a company would decrease the GHG emissions (scope 1) but would do little for overall emissions (scope 2 and 3) if the electricity is produced by fossil-fuels power plants. A coordinated transition between policymakers and businesses is thus necessary.
The limitations of GrDP
Although replacing GDP with GrDP would be a step in the right direction, pursuing GrDP growth alone will not be enough to achieve sustainable growth.
First, by aggregating all the economic activities and externalities in one indicator, GrDP hides the differences within countries and fails to reflect social inequalities. Second, since the scope of the externalities considered is limited in our current version of GrDP, the indicator does not fully factor in the evolution of environmental, social, and human capital. For example, it does not measure plastic pollution and tells us nothing about the exhaustion of materials and minerals. It would therefore be possible to pursue GrDP growth without respecting our planet’s limits, at least in the short term.
Understanding the shortcomings of economic indicators is a crucial step in using them properly in policy and other decision making.
If adopted, GrDP, although incomplete in its mission to capture and cost all externalities, represents a valuable and vital tool for policymakers, industry leaders, and other stakeholders as the world grapples with the threat of climate change and environmental degradation. By taking the negative effects of emissions of a wide variety of pollutants into account head-on, GrDP is a more appropriate measure for the time we live in than the outdated concept of GDP. At the very least, it will support better-informed decision making, helping to shape a more sustainable future for people and the planet.
If you are interested in finding out more about the GrDp indicator and methodology, E4S researchers have published a white paper on GrDP in Switzerland, which can be accessed here.