In today’s Finshots, we discuss green GDP and whether it makes sense.

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The Story

In 1929, the US stock market collapsed, triggering a global economic meltdown or what we now call the Great Depression.

The stage for this was set years earlier during a decade known as the “Roaring Twenties”. After World War I, US factories buzzed with activity. People splurged and businesses thrived.

But beneath the glittering surface, trouble was brewing. The economic optimism meant that many bought stocks with borrowed money, paying only a small upfront margin. So, when stock prices dipped temporarily, these borrowers couldn’t repay their loans. Panic spread, desperate selling followed, and banks collapsed. This spiral devastated economies until recovery slowly began after World War II.

It was during this time that US policymakers struggled to figure out how to put numbers to what was happening in the economy. That’s when Russian economist Simon Kuznets stepped in. He said, “Hey, I’ve created a way to measure how much goods and services are produced by American companies, whether at home or abroad. It’s called Gross National Product or GNP. But if we tweak it a bit to exclude what American companies produce abroad, we’ll get a better sense of how the US economy is doing.”

And just like that, we got Gross Domestic Product (GDP).

Simply put, GDP is the annual value of all goods and services produced within a country. By 1944, at the Bretton Woods conference, it became the global standard for measuring economies.

But there’s one thing we haven’t told you yet. Kuznets didn’t just create GDP, he also cautioned against relying on it entirely. “The welfare of a nation can scarcely be inferred from a measure of national income”, he said.

Simply put, GDP captures production and consumption but ignores critical aspects like environmental damage, resource depletion or even a country’s overall well-being. Or as economist Diane Coyle put it; GDP is a “war-time metric”. It’s useful during crises but says little about creating happiness in peacetime. It tells you how valuable the furniture from the cut tree is, but not what that tree is worth when it stands tall and provides shade.

That’s why some countries are experimenting with ways to improve GDP.

Enter Green GDP, a concept that subtracts environmental costs, like pollution and deforestation, from traditional GDP. Factoring these in gives governments more reason to protect the environment, knowing it directly impacts their economic output.

In fact, just a few days ago, Chhattisgarh further modified this concept by becoming the first state to include the economic value of forests in its Green GDP calculation. By doing this, the state is now considering not just the environmental costs but also the benefits that forests offer. In fact, it’s addressing one of the main flaws that has long haunted the concept of Green GDP itself.

If you’re wondering how, well, you see, Green GDP isn’t a new idea. Over three decades ago, the UN (United Nations) proposed a methodology for its calculation. And countries like the US, China, and Norway tried Green GDP by subtracting the suggested environmental costs from the traditional GDP.

But the idea didn’t take off. For instance, Norway found the valuation techniques for environmental depletion inconsistent. The US abandoned the idea when environmental costs made its GDP figures look weaker. China, too, discontinued it by 2005 after resistance from local governments. 

So, to address these challenges, the UN revised the concept, introducing ways to factor in environmental services like clean air, water and biodiversity. It meant that policymakers could now highlight not just negatives like resource depletion but also positives, such as nature’s contributions. And that’s precisely what Chhattisgarh is doing today.

But does this truly make sense?

See, Chhattisgarh is a state where 44% of the land is covered in forests, providing livelihoods for millions of people. Its rich natural resources are a lifeline for the region. And recently, the India State of Forest Report (ISFR) nudged it to adopt the concept of modified GDP. Thanks to its findings, which highlight a remarkable rise in forest and tree cover in the state driven by biodiversity protection and conservation efforts.

Here’s the problem, though. The ISFR defines forest cover as any area of at least one hectare with a tree canopy density of 10% or more. Now, one hectare is about 10,000 square metres or 1,07,600 square feet. In other words, if 10% or 10,760 square feet of ground is shaded by tree branches, it’s labelled a forest — no matter who owns it or how it’s used. But let’s be real. Can you honestly call that a forest?

Hardly.

This definition of forest includes plantations like oil palm and rubber — a major issue since these often replace natural forests. Unlike thriving ecosystems, these harm biodiversity and disrupt the environment. For example, in India, palm oil plantations have caused deforestation, soil erosion and water cycle disruptions, all while emitting greenhouse gases. Because palm oil plantations, for instance, are often linked to aggressive industrial practices like clearing natural forests, exploiting land and prioritising profit over sustainability. And rubber plantations face more or less similar criticisms. 

But the paradox here? Such activities that destroy forests can still count as “forest cover” under these definitions, painting a misleading picture of conservation.

MD Madhusudan, an ecologist, sums it up perfectly: “If what replaces a forest after it is cut down is also termed a 'forest,' can there ever be forest loss?”

Adding to the complexity, planting trees isn’t always beneficial. For example, introducing trees into grasslands or wetlands can harm native species, disrupt ecosystems and wreck biodiversity. Even the type of trees matter. Native, mature trees are excellent at absorbing carbon and supporting wildlife, while young or non-native trees often fall short. So, if Chhattisgarh focuses only on increasing forest quantity without considering quality, it risks oversimplifying the story.

Then there’s the issue of flawed data collection. Environmental degradation is often tracked using satellite imagery taken at specific times. And governments can manipulate this by choosing when to monitor forests, conveniently hiding issues like stubble burning. It’s like sweeping dirt under the rug and calling the room clean.

And here’s a thought to chew on ― governments could often tout Green GDP to serve their own agendas; be it to secure international funding or polish their eco-friendly image. In India, states have used these metrics to justify industrial projects that may harm the environment in the name of development. A case in point are industrial corridors, often branded as ‘green’ initiatives, despite valid concerns about their ecological fallout.

Now, we’re not saying this applies to Chhattisgarh. But without clear methodology, other states could quickly use this strategy and use modified Green GDP as a convenient mask — balancing industrial ambitions with green narratives. It’s a slippery slope, and that’s why scrutinising these metrics is crucial.

So yeah, maybe it’s time for governments to revisit the drawing board and agree on a standard framework. One that clearly defines what to include and exclude when crunching ecological services into numbers. Plus, they’ll need to ensure transparency so analysts and critics can scrutinise the data and trust calculations.

Else the concept risks becoming another empty buzzword.

After all, green GDP should be a mirror, revealing both progress and loss, and not a tool to tell comforting tales, eh?

Until then…

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