Japan is looking at including environmental externalities in its measurement of growth. This could transform not only the way in which countries measure and manage economies and resources, but provide a framework for companies as well.
As part of its efforts to reduce carbon emissions, Japan is rolling out a green GDP as a new index to calculate economic growth
A green GDP ties economic growth to carbon emissions to account for the environmental impact of business activities.
Implementing a green GDP could provide significant motivation for both governments and businesses to take more urgent action to reduce carbon emissions.
Green GDP could change how Japan does business
The world’s third-largest economy is taking its first steps to implement a new growth index which considers environmental impacts, called ‘green GDP’, which could provide incentives for Japanese companies to decarbonise faster.
Japan’s Prime Minister Fumio Kishida has been promising since January 2022 to release statistics under the country’s new growth measurement – the green GDP. Now the numbers are here – and they could transform how the economic powerhouse does business.
According to data released by Japan’s Cabinet Office, the country’s GDP grew 1.04% annually on average between 1995 and 2020 when accounting for its progress on reducing carbon emissions. This is nearly double the average real GDP growth per year over the same period if emissions reductions were not considered, which is calculated at 0.57%. The government used a method drawn from the Organization for Economic Cooperation and Development (OECD) to calculate emissions-adjusted GDP growth.
The implementation of a green GDP is part of Japan’s wider climate strategy. In 2020, Japan set a target of achieving net zero by 2050 and pledged to cut carbon emissions by 46% in 2030 compared with 2013 levels.
The company has set out three pillars to underpin its journey. These are the promotion of green finance, the promotion of green technologies and international cooperation to adopt green business practices.
Green GDP: A new understanding of growth
On average, to generate US$1,000 of GDP OECD countries emit around 260 kg of carbon into the atmosphere, according to a 2017 OECD report. Historically, economic growth has been tied to energy use and therefore carbon emissions, but this could be shifting if more countries follow Japan’s lead.
A green GDP is simply a new way of calculating how an economy is growing by tying growth to greenhouse gas (GHG) emissions in order to encourage sustainable development. Essentially, a green GDP will increase as GHG emissions drop and reduce if GHG emissions go up.
The traditional way of calculating a country’s GDP focuses only on the hard numbers of economic growth as measured by financial return. However, this method has been criticised as a short-sighted snapshot of growth, and does not take into account the potential economic impacts of climate change.
For example, cutting down a rainforest to clear the area for beef production would increase a country’s GDP by creating more economic activities in the short term. Longer term, its impact on nature could have a negative impact on commodity and/or food supply.
The point is that such activity would significantly increase carbon and methane emissions while destroying a carbon sink, degrading the environment and impeding future economic activities, increasing public health costs, among other potential future costs to a country’s GDP.
“Green growth is about fostering economic growth and development while ensuring that the natural assets continue to provide the resources and environmental services on which our well-being relies”, stated the OECD in a report on Green Growth Indicators. “To do this it must catalyse investment and innovation which will underpin sustained growth and give rise to new economic opportunities”.
By tying a country’s growth numbers to progress on emissions reductions, there is more incentive for the government and companies alike to integrate more sustainable economic activities and business practices.
What a green GDP means for businesses
While the Japanese government has not yet released more information on how they will use and implement the newly calculated green GDP, a shift in perception of economic growth will certainly have an impact on businesses in Japan.
According to a report from consultancy McKinsey, the business sector in OECD countries contributes to 72% of a country’s GDP. This means that the activities of businesses significantly impact a country’s economic status. If a green GDP is imposed as a new standard for calculating growth, this means that businesses will need to cut back on emissions considerably if a country wants to post positive growth numbers.
GDP today is considered an important signal on an economy’s health, enabling policymakers, investors and businesses to make informed decisions as to how best to ensure economic stability and maintain growth. If a GDP declines over two consecutive quarters, it shows that an economy is in recession, which usually acts as a deterrent to attracting new investment and business opportunities to a country.
Therefore, both governments and businesses have incentives to maintain a rising GDP. Governments want to make sure their citizens have jobs and services to maintain well-being and societal stability, and companies want to make sure they can continue to grow their business.
If operating under a green GDP, this means positive growth is reported in conjunction with reductions in GHG emissions. This creates a considerable motivation for the government to institute policies and regulations that oblige companies to reduce emissions and grow a green economy, and also for the companies to actually reduce their emissions instead of just carrying on business-as-usual.
However, the idea and implementation of a green GDP is still a relatively new area of exploration, and its real world impacts are yet to be tested. With Japan now rolling out its green GDP, the world will be able to see how it plays out.