Standard productivity measures follow a private goods perspective, assuming free disposal of bad outputs. But from a social welfare perspective, productivity measures would internalise production externalities. We explore four deviations from the standard measures, including:
Our contribution is two-fold: we believe we are the first to treat environmental protection expenditure as capital investment in the UK context; and, where previous studies have incorporated emissions into economy-wide productivity measures, we utilise the richness of UK data to construct sector-specific environmentally-adjusted productivity for up to 42 industries. UK energy-productivity has more than doubled since 1990, and emissions-productivity almost tripled. Incorporating emissions increases measured output and labour productivity growth, but not enough to explain the productivity puzzle. In some industries, incorporating emissions and pollutants turns GVA negative. Industry-level data indicates that these rapid growths are mostly due to increased efficiency within industries, with only 8-21% due to changing industrial composition since 1990. Incorporating environmental protection as a ‘good’ output raises the level of GVA by around 6-7%, but does not significantly alter its growth rate.
Authors Josh Martin (Bank of England and ESCoE) and Matthew Agarwala (Bennett Institute for Public Policy, University of Cambridge)
