The Carbon Bubble and the Limits of GDP

Lew Daly and I have a new piece at Salon about the carbon bubble. We argue that current valuations of companies mask an unsustainable future. As The Economist puts it, “either governments are not serious about climate change or fossil fuel firms are overvalued.” Elsewhere I’ve noted that the plight of fossil fuel-dependent companies parallels the troubles of many governments, and both problems stem from the same source: bad measurements.

Much as companies struggle to be “long-term greedy,” as Goldman Sachs once claimed to be, governments often sacrifice well-being to maximize Gross Domestic Product (GDP). While GDP is an adequate measure of the market output generated in a state, it is not at all adequate if one is concerned with the well-being of households and communities, or broader social progress. The economist who developed GDP, Simon Kuznets, worried that GDP would become a proxy for social progress. As he put it to Congress in the first national GDP report, in the mid-1930s: “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP…goals for ‘more’ growth should specify of what and for what.”  

Today we measure economic progress, which is now almost considered equivalent to social progress, by looking at GDP. But GDP ignores the sustainability of progress. Progress may not be economically sustainable, like the growth before the recession. It may not be environmentally sustainable if it relies on exploiting a dwindling resource. Or it may be or socially harmful growth, like the growth gained from selling tobacco products.

For all these reasons, many economists, policymakers and activists are calling for new measures of progress. Vandana Shiva argues that GDP is “very gross number. Gross in the sense of gross. Gross because it has generated more bads than it has generated goods. It has perpetuated a model of generating non-sustainability, inequality and a deep violence within society and within the self.” She argues that if you take China and India’s growth and subtract the destruction to water bodies and rivers (not even including air pollution, global warming and mineral exploitation) the countries would be having negative growth. It is time for a new measure.

Other measures are being developed both at the international, national and state level. At the international level, the U.N. has developed the Inclusive Wealth Report. France set up a commission to investigate alternatives to GDP. States within the U.S., including Maryland and Vermont are starting to use the Genuine Progress Indicator to guide policies. Just as these new measures will help us better prepare for the future, companies must take into account the effects of climate change while considering their future in a new, sustainable economy.