TABLE 5 Estimates of Multifactor Productivity in the Electric Power Industry (percent per year)



Incorporating Emission


Conventional Measure

Index Aa

Index Bb













a Index A assumes that marginal damages were constant in real terms. Refer to footnote 6 for more information.

b Index B assumes that marginal damages increased in real terms in proportion to gross national product. Refer to footnote 6 for more information.

SOURCES: Jorgenson and Fraumeni (1990) and U.S. Environmental Protection Agency (1994).

the effects of environmental policies on the economy and distortions in the policy making process. As productivity declined during the 1970s, economic studies claimed that environmental regulations were responsible for up to half of the productivity decline observed in pollution-intensive industrial sectors.

This and similar findings continue to resonate in current environmental policy debates. Behind efforts to weaken environmental laws or their enforcement lies the belief that such regulations impose costly burdens on the economy, stifling innovation and lowering productivity. However, the conclusion that environmental regulations have reduced the rate of productivity growth is an artifact of a basic flaw in the way productivity is measured, as the case presented here for the electricity sector demonstrates.

Similarly, the failure to include natural resource stocks in national accounts leads to the mistaken notion that their depletion contributes to income growth. Again, this follows from a key omission in an important economic indicator.

The series of studies reviewed here show that when economic indicators are restructured to include environmental gains and losses, the results will lead to conclusions that support the economic efficacy of environmental policy: pollution control can increase productivity by reducing environmental damages; wise use of natural resources makes economic sense; and the elimination of commodity subsidies is fiscally as well as environmentally sound.



It may seem anomalous that in 1971 and 1974 depreciation was a negative number, that is, net capital consumption was added to GDP and investment. The reason for this is that the value of

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