A N A N A LY T I C A L F R A M E W O R K F O R I N C LU S I V E G R E E N G R O W T H
illustrated by investments in R&D on photovoltaic power motivated by the desire to mitigate greenhouse gas emissions. Success could make photovoltaics competitive with fossil fuels, increase the supply of electric power, and reduce the cost of providing electric power to remote off-grid communities (see chapter 6). At the same time, the costs associated with environmental efforts create a trade-off between environmental protection and economic production. For example, environmental efforts may have the following effects: • Reduced productivity, by causing producers to use more expensive or less productive technologies or by crowding out R&D in nonenvironmental domains. • Early retirement of physical capital based on polluting technologies (Grubb and others 1995; Jaccard and Rivers 2007). This effect can be represented as a decrease in capital or an increase in capital depreciation. In addition to the direct cost, the increase in investment needed to replace retired capital reduces consumption— and thus welfare — at least over the short term. • Increases in the pricing of some goods and services, altering relative prices. By changing the structure of demand, environmental policies may reduce the ability of the structure of production to meet demand. For example, policies may reduce demand in some sectors that have a high production capacity (such as road transport) and may increase demand in sectors that have more limited production capacity (such as public transportation). This effect can be measured as lower efficiency. T hese costs, and their assessment, depend on the defi nition of economic output. In a green accounting framework that includes valuation of ecosystem services, a reduction in economic productivity because of environmental regulations can be more than compensated for by a reduction in externalities—through, for example, the
preservation of ecosystem services (a topic explored in chapter 2).
What about welfare? Ultimately, however, what matters is welfare, not output. The next step, therefore, is to broaden the framework to take into account the impact of the environment on welfare (or utility), which can be positive or negative. Welfare can be assessed by viewing utility as depending on the current level of consumption and the direct effect of the environment (through its health effects and amenity value). Welfare also depends on income distribution and employment. As such, analysts must take into account the fact that environmental policies may affect different social groups or regions differently. These policies may create jobs for some types of workers in some regions and eliminate jobs for other types of workers in other regions. Because women tend to be more dependent on common property resources and more vulnerable to the impacts of natural resource degradation than men (Foa 2009), environmental protection and green policies can also help improve gender equality, with many economic and social co-benefits. These distributive effects have both social and political economy implications that may require the implementation of complementary policies to compensate losers (see chapter 2). If compensatory financial transfers are possible at zero cost and labor markets are perfect, efficiency can be separated from equity. If such transfers are impossible or costly and labor markets are imperfect, it is necessary to pursue efficiency and equity simultaneously, which may require setting more modest goals (Goulder and Parry 2008). Analysts must also factor in the fact that environmental policies can increase or decrease volatility. These policies can create shocks in the economy and can distort intertemporal trade-offs. But they can also reduce potential risks to growth by increasing resilience to environmental
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