Accounting for Greenhouse Gases in the Standard Productivity Framework

Abstract

The method that Canada and other developed countries use to measure productivity growth generally ignores the pollutants that are produced by the industrial process. For example, greenhouse gas emissions, though an inevitable consequence of production processes, are excluded from the productivity accounting framework. This study proposes an extended productivity measure that takes pollutants into account. It illustrates how it can be applied using carbon dioxide emissions. The proposed experimental measure is based on the standard multifactor productivity framework adjusted for the private cost of greenhouse gas emissions. Using this measure changes the estimate of productivity growth for the business sector. The paper first examines how industries have reduced their CO2 emissions relative to their saleable outputs over the last twenty years. This improvement is a form of efficiency gain. When this is taken into account using the new experimental methodology to estimate multifactor productivity, the estimate of productivity growth that is produced is about 17 percent higher than the conventional estimate over the period from 1981-1996.