Green Growth

Green Growth
By: Andrew Lau

CME 368 - Engineering Economics & Decision Making
University of Toronto

October 6th, 2017

I hereby certify that I am thoroughly familiar with the contents of this report. It is
substantially my own work; I have referenced all my sources of information, and I
am the sole author.

Green Growth October 6th, 2017

Table of Contents
Table of Contents 1
1.0 Context 2
2.0 Green Growth - A Means to Sustainable Development 2
3.0 Economic Analysis of Natural Capital 3

3.1 Ecosystem Accounting 3
3.2 Net Present Value (NPV) 4
3.3 Limitations To Monetizing Natural Capital 4
4.0 Tracking Green Growth Progress 5

4.1 Korea: Analysis Using OECD Indicators 5
4.2 India: Analysis Using Locally Derived Indicators 6
5.0 Green Growth Strategy Implementation 7

5.1 Engineers Need To Establish Best Practices 8
5.2 Investments In The Triple Bottom Line 8
6.0 Conclusion 9
Sources 10

1

1.0 Context

Since the beginning of human life, nature has played an integral role in our
survival. In addition to providing resources, nature supports humanity through
ecosystem services such as water purification and carbon storage. But as the
world industrializes, natural capital is expensed for economic growth, putting the
environment and society at severe risk for the current and future population [1].
This crisis establishes the need for “Green Growth”, a holistic growth measure to
ensure that natural assets can continually provide for society’s well-being in
addition to driving traditional growth in the economy. By exploring the current
efforts and challenges with pricing natural capital, tracking growth progress,
and implementing green growth strategies, it is evident that green growth is a
critical tool for engineers to integrate into economic analysis to ensure
measurable progress in sustainable development.

2.0 Green Growth - A Means to Sustainable Development

According to the UN’s 1987 report “Our Common Future”, sustainable
development uses the triple bottom line accounting framework of economic,
environmental, and social performance to “(meet) the needs of the present
without compromising the ability of future generations to meet their needs.”
[2][3]. Green growth is vital to sustainable development as it is a metric-based
strategy for connecting the environmental and economic pillars of sustainability,
while accounting for their connections with societal well-being. Additionally,
green growth indicators define the limits of sustainable development, which are
“limitations imposed by the present state of technology and social organization
on environmental sources and by the ability of the biosphere to absorb the
effects of human activities.” [2][4]. Essentially, true sustainable growth is limited
by nature’s capacity.

Sustainable growth is vastly different than conventional growth, which has been
dominated by an economic perspective. GDP, the primary indicator of growth,
represents the market value of all goods and services of a country, neglecting
the environmental and social consequences of those measured products [5].
Although economic growth can be linked to improvements in quality of life and
decline in poverty, the corresponding environmental effects are inversely
proportional as natural resources are required to drive that growth [6]. For
2

example, providing electricity to a rural community in a developing country

would improve their quality of life at the expense of burning fossil fuels and
releasing air pollution. This introduces a large gap between how growth is being
reported and the development realities of any given country. Given that
environmental conservation is a long-term, complex strategy, it is not reflected in
the short-term production and consumption cycles contributing to GDP [1]. For
example, habitat preservation is an effort that would not be accounted for in
GDP, while overfishing would increase GDP [10]. Green growth exists to close this
gap by introducing new metrics that connect the environment with the
economy and society, such as “environmentally induced health problems and
related costs”, forming the basis for tracking progress in sustainable
development [7].

3.0 Economic Analysis of Natural Capital

In order to track holistic development progress, natural capital must be
incorporated into economic analysis. This would allow policies and land use
decisions to be made based on a cost-benefit analysis, or alternatively,
multi-criteria analysis or cost-effectiveness analysis [8]. While multi-criteria is a
holistic analysis suitable for green growth, cost-benefit and cost-effectiveness
analysis are difficult to use for natural capital due to the challenge of converting
natural capital into monetary values, which requires “the physical and monetary
measurement of (changes in) ecosystem services supply...to be recorded in a
way that is aligned with the measurement approaches prescribed for national
accounts and for environmental economic accounts.” [9]. It is essential to
integrate the state of the environment into economic analysis as economic
analysis heavily influences decision making and policy changes around land use
[10] . By examining different approaches to environmental accounting, it is
evident that although natural resource pricing is appropriate in some cases, it is
not a sufficient method for measuring green growth.
3.1 Ecosystem Accounting

In an attempt to “[describe] stocks and changes in stocks of environmental
assets” [11], the United Nations (UN) developed the System of
Environmental-Economic Accounting (SEEA) framework to “integrate
environmental statistics with economic statistics using the organizing principles,
classifications, and definitions of the [System of National Accounts] (SNA).” [9].
Ecosystem accounting is an improvement upon the SEEA Central Framework of
3

2012, which analyzed ecosystems without considering the interactions of its
individual components. The solution that ecosystem accounting provides is
economic analysis based on 5 ecosystem accounts in physical and/or monetary
metrics: ecosystem condition, services supply, services use, capacity, and
biodiversity [12]. This method measures environmental assets and estimates the
economic impact of those assets using market exchange values. For example,
fish, a natural asset, can be converted into a market price using an exchange
value given by commercial fisheries. However, ecosystem accounting ignores
ecosystem services that are non-marketable, such as providing animal habitat
[13].

3.2 Net Present Value (NPV)

To ensure both marketable and non-marketable assets can be converted to
monetary values for economic analysis, the SEEA Experimental Ecosystem
Accounting (EEA) introduces the idea of measuring the net present value (NPV)
of the expected flow of ecosystem services.” [13]. While this metric would allow
for simple present value comparison between ecosystem services, “forecasting
ecosystem service flows is a challenge in analysing ecosystem asset value on
the
basis of the NPV of the expected service flow, particularly when these flows are
non-sustainable.” [13]. Unsustainable service flow means that the natural capital
is being depleted beyond the ecosystem’s capacity, which increases the
complexity of the ecosystem dynamics due to its connectedness, resulting in a
NPV with a high degree of uncertainty [9][13].
3.3 Limitations To Monetizing Natural Capital

The limitations of ecosystem accounting shows that putting monetary values on
all natural capital will not result in accurate economic analysis due to the
interconnected nature of ecosystems. For example, because SNA and SEEA
account only for production, welfare benefits, like culture significance, are not
represented in the analysis. It is also difficult to use ecosystem accounting to
drive sustainable development as “[it] does not provide a tool to understand
and design measures to deal with long-term effects and risks resulting from
ecosystem and climate change” [12], which are major factors in defining the
limit of sustainable resource use. Although monetizing all natural capital will
greatly simplify environmental accounting and policy & decision making, the
complex interactions within ecosystem components conflict with the more linear
4

structure of conventional economic growth analysis, therefore establishing a

need to make decisions using more diverse indicators [1].

4.0 Tracking Green Growth Progress
Since sustainable development is dependant on the three pillars of economic,
environmental, and social growth, and monetizing natural capital does not
provide a holistic snapshot of a country’s growth, a set of indicators is needed to
track green growth progress. By analyzing Korea and India’s published green
growth reports, a comparison of two different sets of growth indicators can be
seen, as Korea is an OECD member country and used OECD indicators while
India is a G20 economy and used locally researched indicators [7][15][16].
Additionally, Korea’s strategy and policy framework makes it a leader in
pursuing green growth, whereas in India, green growth is a new concept
[14][15]. Despite the different metrics used, both reports share the objective of
using green growth assessment towards sustainable development.

4.1 Korea: Analysis Using OECD Indicators

In order to standardize green growth reporting, the Organisation for Economic
Co-operation and Development (OECD) developed 4 groups of indicators to
assess the primary components of green growth: Environmental and Resource
Productivity, Natural Asset Base, Environmental Quality of Life, and Economic
Opportunities & Policy Responses. Each group consists of multiple proposed
indicators, allowing countries to perform analysis on the applicable and
statistically feasible indicators [7][15]. Korea’s chosen indicators and
corresponding trends can be seen in Figure 1.

5

Figure 1. Korea’s Green Growth Indicators
Taken from [15]
4.2 India: Analysis Using Locally Derived Indicators

The report “Urban Green Growth Strategies for Indian Cities” is unique as the
framework, definitions, and indicators for green growth were developed from
first-hand interactions with the cities of interest instead of using an existing
framework for analysis like OECD member countries. The objective of the report
is to unlock green growth potential in India, so 10 rapidly growing cities were
selected based on function, location, and physical features [16]. The
“sub-indicators” (equivalent to “indicators” in Figure 1) presented in Figure 2
below were used to analyze each of the six development areas: environment,
economy, housing, transport, water supply / sanitation, and solid waste
management [17].

6

Figure 2. India’s Green Growth Indicators
Taken from [17]

Korea and Indian can both be considered “advanced” in assessing Green
Growth, as Korea was the third country to produce a report from OECD
indicators, while India was innovative in establishing their own framework for
implementing and analyzing green growth. Though the metrics used in the two
countries differ, the indicator categories were all developed from the triple
bottom line of sustainable development (Section 2.0). Therefore, all countries
working towards improving their green growth measures are striving to ensure
that development decisions and policy changes will benefit the economy and
societal well-being without depleting environmental resources in both the short
and long term.

5.0 Green Growth Strategy Implementation
Although green growth indicators are closing the gap between environmental
resource accountability and economic analysis, natural resource depletion has
developed into a complex, systemic issue which challenges the implementation
7

of green growth. Green growth is primarily a policy framework [7], but engineers

can accelerate the implementation process through a establishing best
practices and capital investment.
5.1 Engineers Need To Establish Best Practices

A case study of sustainable road infrastructure procurement in Australia shows
that engineers play a very important role in implementing green growth by
establishing and promoting best practice while driving innovation in industry. The
overall goal was to develop a tool for the construction industry to reduce
greenhouse gas emissions (GHGe) from large road infrastructure projects, which
directly impacts the “GDP/GHGe” OECD indicator of green growth [7]. A series
of initiatives have been established in Australia, such as the Australian Green
Infrastructure Council (AGIC) grading scheme for “evaluating sustainability
across the design, construction and operation of infrastructure” [18]. However,
these national initiatives do not translate into field practices, as an assessment
by Lehtiranta, Hampson and Kenley found “a lack of established best practices,
standardized procedures and guidelines for GHGe assessment and reduction.”
[18]. This is a gap that engineers are in the best position to fill, given their
involvement in all stages of a construction project. The study found that
“incentives are most effective when applied at the earliest project phases” as
GHGe guidelines can affect the design and project management [18].

In addition, engineers have the opportunity to ensure best practices are used in
the field by performing quality assurance checks, especially for new
construction methods and requirements. When engineers do their due diligence
in implementing green growth policies affecting their field, best practices will
lead to standardized procedures, transforming procurement initiatives into
requirements.
5.2 Investments In The Triple Bottom Line

In addition to establishing best practices, growth requires investments to be
made today. Green growth requires four areas of investment, which align with
the definition of sustainable development: human capital, natural capital,
physical capital, and innovation [11].

Investment in human capital is necessary as skilled trades need to shift as
markets trend towards renewable energy sectors in response to combating
GHGe. Studies that have analyzed how jobs are affected by green policies
8

“suggest that climate-change policies in general and renewable energy

policies in particular can generate considerable extra employment.” [11]
Renewable energy is an example of investing in natural capital, along with
agriculture and manufacturing, which all need to be sustainably managed to
achieve green growth. However, transitioning towards alternative means of
resource extraction and production induces trade-offs such as increased
consumer pricing. This can be offset by investing in research and development,
which lead to innovative approaches to work towards green growth. For
example, China subsidizes research in photovoltaic cell production in order to
increase exports, creating a new market that supports green growth.

Lastly, investment in infrastructure is critical to green growth as properly built
infrastructure supports the society, environment, and drives the economy.
Investing in natural capital, human capital, and innovation are complementary
and necessary for infrastructure investment. Many green growth indicators and
goals, like wastewater management, are not achievable if the existing
infrastructure does not exist to support it. Therefore, investing in well-planned
infrastructure directly supports all aspects of sustainable development.

6.0 Conclusion
By using holistic indicators and investing in infrastructure, green growth is an
effective strategy towards achieving sustainable development through
incorporating natural capital in economic analysis. Engineers can play an
critical part in implementing green growth by adopting the various national
green growth initiatives as best practice, therefore creating a consistent
framework for integrating green growth into industry practices. After all, the field
of engineering exists to solve the world’s problems, and we would be failing as
engineers if we ignore the potential of green growth in solving the systemic
challenge of sustainable development.

9

Sources

[1] Guerry, A. et al. (2015). Natural capital and ecosystem services informing
decisions: From promise to practice. [online] 112(24). Available at:
http://www.pnas.org/content/112/24/7348.full [Accessed 5 Oct. 2017].

[2] United Nations. Report of the World Commission on Environment and
Development: Our Common Future. (1987). [online] Available at:
http://www.un-documents.net/our-common-future.pdf [Accessed 5 Oct. 2017].

[3] Slaper, T. and Hall, T. (2011). The Triple Bottom Line: What Is It and How Does It
Work?. [online] Available at:
http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html [Accessed 5 Oct.
2017].

[4] OECD.org (n.d.). What is green growth and how can it help deliver
sustainable development?. [online] Available at:
http://www.oecd.org/greengrowth/whatisgreengrowthandhowcanithelpdeliver
sustainabledevelopment.htm [Accessed 5 Oct. 2017].

[5] OECD Data. (n.d.). Gross domestic product (GDP). [online] Available at:
https://data.oecd.org/gdp/gross-domestic-product-gdp.htm [Accessed 5 Oct.
2017].

[6] World Bank. Inclusive Green Growth: The Pathway to Sustainable
Development. (2012). [online] Available at:
http://siteresources.worldbank.org/EXTSDNET/Resources/Inclusive_Green_Growt
h_May_2012.pdf [Accessed 4 Oct. 2017].

[7] OECD. Green Growth Indicators 2017. (2017). OECD Green Growth Studies.
[online] Available at:
http://www.keepeek.com/Digital-Asset-Management/oecd/environment/gree
n-growth-indicators-2017_9789264268586-en#page1 [Accessed 4 Oct. 2017].

[8] Ackerman, F. (2008). Critique of Cost-Benefit Analysis, and Alternative
Approaches to Decision-Making. [online] Available at:
https://www.foe.co.uk/sites/default/files/downloads/policy_appraisal.pdf
[Accessed 6 Oct. 2017].
10

[9] Edens, B. and Hein, L. (2013). Towards a consistent approach for ecosystem
accounting. [online] Available at:
https://www.researchgate.net/publication/257342745_Towards_a_consistent_ap
proach_for_ecosystem_accounting [Accessed 4 Oct. 2017].

[10] National Research Council. Valuing Ecosystem Services: Toward Better
Environmental Decision-Making. (2004). [online] Chapter 4: Methods of
Nonmarket Valuation. Available at:
https://www.nap.edu/read/11139/chapter/6 [Accessed 5 Oct. 2017].

[11] United Nations. System of Environmental-Economic Accounting 2012 -
Central Framework. (2012). [online] Available at:
https://unstats.un.org/unsd/envaccounting/seeaRev/SEEA_CF_Final_en.pdf

[12] Hein, L., Obst, C., Edens, B. and Remme, R. (2015). Progress and challenges
in the development of ecosystem accounting as a tool to analyse ecosystem
capital. [online] Available at:
https://www.researchgate.net/publication/276542688_Progress_and_challenges
_in_the_development_of_ecosystem_accounting_as_a_tool_to_analyse_ecosyst
em_capital [Accessed 5 Oct. 2017].

[13] Hein, L., Bagstad, K., Edens, B. and Lesschen, J. (2016). Defining Ecosystem
Assets for Natural Capital Accounting. [online] Available at:
https://www.researchgate.net/publication/309876044_Defining_Ecosystem_Asse
ts_for_Natural_Capital_Accounting [Accessed 4 Oct. 2017].

[14] OECD.org. (n.d.). Green growth in action: Korea. [online] Available at:
http://www.oecd.org/korea/greengrowthinactionkorea.htm [Accessed 5 Oct.
2017].

[15] Statistics Korea. Korea's Green Growth based on OECD Green Growth
Indicators. (2012). [online] Available at:
https://www.oecd.org/greengrowth/Korea's%20GG%20report%20with%20OECD
%20indicators.pdf [Accessed 5 Oct. 2017].

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[16] ICLEI – Local Governments for Sustainability, South Asia. Urban Green
Growth Strategies for Indian Cities. (2015). Urban Green Growth Strategies for
Indian Cities, [online] 1. Available at:
http://gggi.org/wp-content/uploads/2015/02/Green_Cities_India_VOLUME_1-.p
df [Accessed 5 Oct. 2017].

[17] ICLEI – Local Governments for Sustainability, South Asia. Green Growth
Good Practices. (2015). Urban Green Growth Strategies for Indian Cities, [online]
3. Available at:
http://gggi.org/wp-content/uploads/2015/02/Green_Cities_India_VOLUME_3.pd
f [Accessed 5 Oct. 2017].

[18] International Institute for Sustainable Development. Procurement,
Innovation and Green Growth: The story continues... (2012). [online] Available
at: https://eta.lbl.gov/sites/all/files/publications/procurement_innovation.pdf

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2.0 Green Growth - A Means to Sustainable Development 2

3.0 Economic Analysis of Natural Capital 3

4.0 Tracking Green Growth Progress 5

5.0 Green Growth Strategy Implementation 7

example, providing electricity to a rural community in a developing country

3.1 Ecosystem Accounting

3.2 Net Present Value (NPV)

3.3 Limitations To Monetizing Natural Capital

structure of conventional economic growth analysis, therefore establishing a

4.1 Korea: Analysis Using OECD Indicators

4.2 India: Analysis Using Locally Derived Indicators

of green growth. Green growth is primarily a policy framework [7], but engineers

5.1 Engineers Need To Establish Best Practices

5.2 Investments In The Triple Bottom Line

“suggest that climate-change policies in general and renewable energy

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